Make Freedom from Debt a Primary Goal

Make freedom from debt a priority, even if you do not yet see how you are going to accomplish it. Each time you are faced with a decision, evaluate whether the outcome is going to further your goal of paying off your debt and living debt-free. If not, you must decide whether the rewards are worth the amount you will pay in interest by not paying your debt off early. Suppose taking a particular job will give you valuable work experience that will add to your resume and further your career, but the starting salary is so low that you will have to reduce your payments and pay off your debt over a longer period of time. Is the benefit worth the cost? How about spending your tax refund on a two-week tropical vacation?

Are the stress relief and the time spent bonding with your family or friends worth the sacrifices you might have to make later? Could you shorten the vacation or stay closer to home, and put half of that money toward paying off the loan? What if your company matches your 401(k) contribution up to 3 percent of your salary?

Are you going to gain more from claiming the matching funds and earning a 4 percent return on the savings you sock away, or from using that money to quickly pay off a private student loan with a 12 percent interest rate? Some trade-offs, particularly those that promise long-term benefits like retirement savings or career advancement, may be worth making, and there may be times when, for personal reasons, you choose instant gratification over paying off your loans earlier. At least you are making a conscious choice and weighing the consequences of your actions. When you are aware that you are making a choice, you are less likely to act irresponsibly or in a way that drives you further into debt.

Know Your Financial Realities

The first step to your future financial security is having a clear understanding of your present circumstances. Based on this understanding you will be able to identify your needs and your resources, develop a plan of action, and regularly evaluate your progress to see whether you are still on course.

Income and Outcome

Begin by making a list of all your financial assets, including the money in your checking and savings accounts, investments, and savings bonds. If possible, use a spreadsheet on a computer so that you can do calculations and rearrange the information easily. Next, write down your regular monthly income from all sources. If your income comes at intervals from commissions, contracts, or royalties, write down what you have received over the last six months, and any payments you expect to receive within the next three months, and divide the total by nine. This should be reliable income that you are certain of receiving; note tentative income and pending contracts separately. Now, take a look at your bank statement and credit card statements for the last month, and in another column, write down the amount you have withdrawn from each account. Subtract any major one-time expenditures, such as the purchase of an appliance or payment of a large medical bill. Add up your income and your expenditures, and compare them. If your expenditures for the last month were greater than your income, you need to act quickly to avoid going deeper into debt. Think about how last month compares to other months of the year; was it a typical month, or a month in which you had extra expenses, such as property taxes or Christmas shopping? Are there months when you spend less to compensate? Now make a list of everything you owe: student loans, credit card balances, mortgage, and money you borrowed from a friend or parent.

Create a “Picture” of Your Student Loans

Gather all your student loan documents together and create a chart or a spreadsheet of all your loans. You can begin by going online and looking up your federal loans in the National Student Loan Data System, at www.nslds.ed.gov. Details of private and federal loans obtained through Sallie Mae can be found at Loan Advisor Money Lender. If you borrowed directly from a private lender, look up the information on your promissory note and loan documents, or contact the loan servicer directly.

On a chart or spreadsheet, write down the name and contact information of the loan servicer for each loan, including a telephone number and Web URL, and your account number. Beside each loan, write down the type of loan, the school you attended, the date when the loan was disbursed, the amount of the loan principal, the interest rate, the amount of principal and interest outstanding, the term of the loan, the repayment plan, and the monthly payment and due date. If you have a consolidation loan, remember that it was used to pay off underlying loans that are no longer outstanding. FinAid.org has a convenient chart, at www.finaid.org/loans/studentloanchecklist.phtml, that you can print and fill in. This loan “picture” will help you understand your obligations and make decisions about paying off or consolidating loans. It will also serve as a reference when you need to contact your loan servicer. It is impossible to say exactly how much you will finally pay; the amount is affected by the length of time over which you pay the loan off, whether you have periods of forbearance or make extra payments, and variations in interest rates. You can use calculators, however, to estimate how much you will pay under different circumstances. Add a column to your loan chart showing how much you will pay if the loan is paid off in ten years. Update the chart whenever you make extra payments to bring down the loan balance.