By Phil DeGisi, CommonBond
It's June. For all of you Class of '15 MBA grads, congrats on graduating! While it's an exciting time, it can also unfortunately bring the dread that comes with finally looking at your student loan bill. Things just got real.
As someone who now works at CommonBond, a company that's disrupting the student lending industry, I hear the above sentiment fairly often. Both first-year students and recent grads will ask, "How on earth am I going to pay back all of these loans?" There is no magic trick to make your loans disappear (lotteries and large inheritances notwithstanding), but I have some tips on paying them down based on my own experience.
When I decided in 2007 to attend the Tuck School of Business at Dartmouth, I knew I would need to finance the majority of my MBA with student loans. Here's what I've learned since then that enabled me to pay off my loans in a little under six years.
To set the scene: I took out over $150K in loans, and when all was said and done, I paid over $180K, including interest, over 6 years. Back when I started school, the interest rates on my student loans ranged from about 6.5% (a subsidized loan that my school offered up to a limit) to 8.5% (the majority of my federal loans). I was lucky enough to not have student loan debt from undergrad, or any other installment debt like auto loans, so this was the only debt I was paying off. When I got the final "tab" after graduating, reality set in: I had a 6-figure bill that was accruing interest... It was time to get to work. Here's how I managed my student loan debt:
Plan your post-graduation budget before graduation
When I was leaving school, I was moving to a new city and a new apartment. One of the first things I had to do was understand my anticipated student loan monthly payments (after grace period) to make sure that my budget could withstand my rent, parking, daily expenses, and loan payment. I logged in to the two servicers that I made my student loan payments to and found how much I'd owe each month. Balancing student loans and living expenses in major cities like New York and San Francisco can be difficult, but there is no quicker way to paint yourself into a financial corner than to overextend yourself with your living expenses.
Direct deposit is your friend
Right before my grace period ended, I idiot-proofed my payments. That is to say, I set up my student loan payments to automatically debit from my checking account so that I would never miss a payment. Being in debt was tough enough, so the last thing I wanted was to get hit with a fee or hurt my credit. It's worth noting that many lenders, like CommonBond, will offer a 0.25% rate reduction by setting up autopay from your checking account.
Pay more than the minimum (if you can)
For my first six months paying student loans, I paid the exact amount due while I got my bearings on my new job, city, income, and expenses. Once I confirmed that I was in a good place financially, I slightly increased my payments such that I was overpaying each month and therefore paying down my loan principal quicker. Even if the extra payment wasn't a ton of money (ranging from $50 to $200 per month over the years), I thought these payments could add up to thousands of dollars over time (which they did).
Put your "upside dollars" towards student loans
I was not in an industry where bonuses were astronomical, but I did get some year-end bonuses in my first job and later received restricted stock at future companies. I put as much as humanly possible from these proceeds against my student loans. By prepaying chunks of my student loans 1 to 2 times per year, my outstanding debt really began to come down, and the light at the end of the tunnel began to peek through.
What I wish I knew then that I know now
All of the above tactics got me to the point where I paid off my debt in a little under 6 years, or 4 years ahead of my 10-year term.
What would I have done differently? Honestly, probably not too much. I don't, for example, regret taking vacations over that time period instead of paying off my loans at absolute maximum speed. Everyone's financial situation will be different, but for myself, I wanted to have a balance that was responsible but allowed for some discretionary spending.
Since I graduated from business school, some things in the industry have changed, in large part due to companies like CommonBond that offer students a) low rates on MBA student loans (lower than the rates on federal loans) and b) the ability to refinance student loans to a lower rate. Both of these options would have saved me well over $10,000 in payments if they were available back then - at that point, my only choice was to consolidate my federal loans, which would've kept the weighted average of my student loan interest rate the same and just would've decreased the number of bills I paid monthly.
I've read a few great pieces over the last year on how some folks pay off enormous sums of loans in just two or three years by living at home or challenging themselves to not spend a dollar on anything beyond getting to work and eating. I applaud those people for their dedication - getting yourself out of debt is an amazing feeling. Your own experience will vary based on your anticipated field of employment, any prior debt you have, and the amount you borrow for business school. That said, with good planning and understanding of the tools available to you, like refinancing, you'll have a great shot at putting your student loan debt behind you quicker than you think.
*For more on Phil DeGisi's career journey post-MBA, check out this piece on how he made the switch to a startup.
Phil DeGisi is Head of Marketing at CommonBond, a student lending platform that provides a better student loan experience through lower rates, superior service, a simple application process, and a strong commitment to community. CommonBond is also the first company to bring the 1-for-1 model to education and finance.