There are many reasons why we don’t have large debt payoff stories from the low-income. First, the math doesn’t add up. Yes, people side hustle and get salary increases, but usually that takes some time to get started and you’re not making the big bucks immediately. So the people who can do this, are rare.
Second, and most importantly, people shouldn’t get into big student loan debt and have a low salary job.
There are the stories of people who graduate with hundreds of thousands of dollars of debt who work at the poverty line. Yeah, that’d be a great story if someone succeeded given those odds. And it’s possible that someone can graduate with six figures in student loan debt and eventually pay it off on an entry level salary. Yes, this makes for the start of a great story but the vast majority of these stories are not going to end well. This is not something to aspire to. Most of these stories are not told in articles because they’re not going to end well, and people don’t want to read those articles. They want the inspiration.
Yes we can congratulate someone and admire someone for having the fortitude to pay off an insurmountable mountain of debt. But let’s not forget that it was probably a mistake somewhere along the line first to get into such large debt and have a low-paying job. That’s a failure of the system if you graduate with a lot of debt and only work a low-paying job.
And yes, we should and need to talk about out-of-control higher education costs and how easy it is to get into ridiculous amounts of debt for low-paying degrees. We should talk about how low-income people are caught in a catch-22 because they want to get better jobs, are required to get college or graduate degrees in order to get ahead. And we don’t have to blame the person for making this mistake because it’s a hard place to be in, but we also need not make it seem normal to graduate with way too much debt and pay it off on a low salary.
It’s great that there are inspirational student loan debt payoff stories. But let’s not forget the fundamentals – first, don’t take out too much debt. The rule of thumb is not to have higher total debt than your median first year salary. Also generally don’t to go to NYU. Or get an MFA.
So yes, I had six figures of debt and six figures of income. My debt payoff story is really boring. It’s meant to be boring. I’m proud that it’s boring. I don’t want to encourage anyone to have an exciting debt payoff story where they pay off a crazy sum of money in a short period of time on a low salary because that’s a recipe for a very stressful life. Boring is good when it comes to money. Prevention is most of the battle.
I was fortunate enough to graduate from college debt free. Then I had to go and attend law school where I racked up $112,000 in student loan and credit card debt. So you can add this to the unremitting list of “student loan debt payoff” stories. I will admit that my story is more boring than most:
My secret is that there is no secret: I got paid a salary that made it possible to pay off the debt while living a reasonable lifestyle. There are no magical tricks herein. My story is completely mathematically realistic.
The high income was the most important key to paying off my debt. Still, there were a few basic guidelines I followed that helped me pay off the debt.
1. I Reduced Student Loan Debt Before Repayment
Part of the reason I was able to pay back my student loan and credit card debt in such a short time was that a year and a half is not that long a time to sacrifice. Had I taken the maximum load of debt offered to me, it wouldn’t have been feasible to pay off the debt for several years, and I likely would have given up the fast-paying scheme.
The more interesting articles are why I only accumulated $112,000 in debt as opposed to upwards of $180,000, which is the full cost of tuition, fees and approximate living costs at my law school for three years, without interest:
It was critical that I was entering a profession that offered jobs that could be high enough to pay off this debt in a reasonable time period. I worry sometimes that these amazing debt paying stories may encourage people to accumulate huge debt while preparing to enter low-paying fields. My favorite debt payoff stories are boring because it’s a bad situation to end up with a lot of debt and a low income. Don’t accumulate so much debt that it becomes mathematically impossible to pay back!
2. I Used my Bonuses
I was lucky enough to get two bonuses during this time period, both of which I put completely towards my debt. I didn’t even consider using the money to buy anything else. What motivated me was that I wanted to be debt-free more than I wanted any more stuff or experiences.
3. I Plowed All of My Money Towards Student Loan Debt First
After bonuses, I paid about $5,000/month for 18 months to pay off my loans. I had an auto payment of approximately $3,000/month (3 times my minimum loan payment). Then I would make periodic extra payments. I could have made a higher automatic payment but I had already had one disaster where extra expenses left me without sufficient funds to pay my rent and credit cards on time. I figured I’d give myself a little more leeway on the monthly payment.
Instead, I would make extra payments when my bank account looked high. Having large balances in my bank account that encourages me to spend. Low balances, even if they are artificially low – like the money is in a separate bank account – subliminally encourage me to spend less. So the extra payments served both to pay down my debt and discourage spending. Still, it was really difficult sending such large amounts out of my bank, particularly after loan payments were already taken out. It was like ripping a bandaid off. You force yourself not to put it off and then when you get to it, you do it quickly and move on. If I had given myself the option, I would have left the money to wallow in my bank accounts. But I was determined to pay off my debt.
4. I Knew the Value of Money
After maxing out my 401k, transportation, taxes and health benefits, and after rent and utilities, and paying off my loans, I had $1,100/month left. That covered the cost of my car, home goods, clothes, food, insurance – basically everything else. For a lot of new lawyers, $1,100/month is too low. (I knew a classmate that was renting a $7,000/month apartment after all).
But $1,100 was enough money for me and I knew the value of this amount of money. When I was an entry level employee, I lived on just a little bit less disposable income, because I was maxing out my 401k. And I remember during that time wanting for nothing.
I was used to living like a law student. Knowing that I could survive on less was invaluable knowledge to me. I wouldn’t have paid off such large chunks of debt so quickly had I thought I would have had to feel deprived. I knew the value of money so I knew how to be happy with less.
I cooked at home. I kept my 15 year old car. I shopped at JCPenney to create my corporate work wardrobe. I bought a handbag from Target. I rarely shopped and, in fact, my apartment was basically unfurnished for my first six months working. I didn’t get a smart phone until 8 months in, relying on my work phone if I needed to look something up. I was used to this lifestyle, and even though it’s been years since I’ve paid off the debt, this is not so different than how I live today.
5. Everyone was in the same boat
I knew I could live on less, but I also had more expenses in this time period than ever before. I had medical expenses, a new wardrobe, a drastically increased rent. During this time, It helped that most of my friends were also paying back loans and lived similar lifestyles. A lot of my friends were supporting their parents with their salaries. It also helped that we worked such long hours our first year that we had very little time to blow through our money. (Some people though would take this as license to spend more). I didn’t take my full vacation days until 4 years in (I don’t recommend this – I mean take a frickin’ staycation even. But forgoing expensive vacations does save money).
I felt that I was able to maintain a fairly comfortable existence – just without any lifestyle inflation – and I knew that the time for watching my purchases was short. It was a small price to pay to be debt-free in 18 months.
How I Paid Off $112k in Student Loan Debt
So there you have it – I paid off my loans by reducing the loans I took out, making enough money to cover the loans I had and then just throwing money at the loans until they disappeared.
It was technically possible, and indeed my initial plan was, to pay off the debt in one year. But I thought my life was becoming too Spartan. I had increasing visions of dying without having bought a sofa for my apartment. So I went on Craigslist and I bought a sofa and chair for $60. (frugal doesn’t change, natch).
Whatever your plan, being debt free is amazing. I don’t regret any part of it (even law school, which is rare among lawyers).
Paying for higher education is a huge issue these days. I knew I was on my own when it came to graduate education. Fortunately, I worked for four years in between college and grad school. I scrimped and saved and then cashed out my retirement account to pay for graduate school. I couldn’t find any articles that recommended this approach. I’m sure it’s a controversial way to do so but it worked out ok for me.
It was spring of my fourth year at college. I was barreling toward graduation with a job offer with the federal government. This was pre-recession so this was more or less average, instead of exceedingly lucky. And I, as a completely entitled millennial, pictured the next 30 years of my life working in a gray cubicle under fluorescent lights in this office.
And that frightened me (though I tell myself the sexual harassment was the bigger issue with that job). When one of my friends excitedly told me she was going abroad for a year with some of our mutual friends, I jumped ship at the chance.
An Inauspicious Start
I spent one year abroad, where I saved nothing, My first six months back in the States, I floundered about at temp jobs, making $10-20/hour, though I still managed to save because I was living rent-free with my parents. In my last six months, I was unemployed after having been laid off, though I still collected unemployment. But for a solid 2 years I was gainfully employed as a financial analyst. I hunkered down at the whole “being an adult” thing. This is not the start you would expect for someone who saved $65,000 for grad school in 4 years, making, at most, $44k annually.
When I was 21, I read about 401ks and retirement in the book Financially Fearless by 40 by Jason Anthony. I was appalled that I hadn’t started saving at the ripe old age of 22. My dad is an accountant! Why didn’t he warn me?
But my parents had always taught us the value of saving. I decided that when I was fully vested I would max out my 401k even while I was making $42k and then $44k a year. Because the 401k is pre-tax, I saved a bunch on taxes by maxing it out, and I still had enough money coming in my paycheck for a simple existence. With the company match, I was saving about $20k in my 401k. Then I saved $5k in my Roth IRA. On top of that I saved a few thousand into my savings account and had saved a few thousand before and after this job while working odd jobs. So that’s the basic arithmetic answer of how I saved this money.
The aggressive 401k contribution was a method of forced saving. After I made the election, I was far too lazy to do anything about it so I just had to adjust my spending. I benefitted from the tax savings, which came to an extra few thousand a year. Being a natural hermit and a scrooge also helped. I was paying $800/month in rent. This was a reasonable rent 10 years ago but is on the low end for the Washington, D.C. area now, though I still see rents this low. We didn’t have a TV or cable. The furniture was sparse – scrounged from a collaboration of my office’s discarded furniture, Ikea and this sweet Jennifer Convertibles sleeper couch for $200. (Selling that couch was a huge mistake).
How I Saved $65k in 4 Years
We ate at home and I can’t remember doing a lot during these two years though I do remember studying for the LSAT. I went to work and I went home and did logic puzzles and wrote essays. On the weekends we visited our parents. Note: this is a highly effective way to save money and be completely lame.
But the key was having the money withdrawn immediately. When my sparse paychecks arrived, that was all I could spend. And in fact, I didn’t even spend all of it. I think a lot of people may have worked jobs where they weren’t making bank right out of college. Sometimes people think, “I need to make $X before I can save money.” If $X is barely over minimum wage, then perhaps this person is correct. But I think for many people, even if we aren’t making that much money, saving small amounts of money is valuable. And making it harder to spend money is an easy way of forcing yourself to do that.
So I’m sure you’re saying, well you saved a lot of money for retirement. But how did you use that toward grad school?
Well, I liquidated most of my retirement savings to pay for grad school.
The Controversial Part – Should You Cash Out Retirement Accounts For Higher Education?
A financial adviser would say I was foolish for withdrawing from my retirement accounts to pay for school. I probably was. I’m not going to argue this was a smart thing to do. It was what I felt at the time was a good use of my money. (And to be fair, I did such a poor job of investing my money, it really hasn’t grown much even as the stock market has soared). I took out the max federal loans and paid the rest with savings and strategic withdrawals from my retirement accounts. I didn’t take any private loans.
The money I saved in these two years would have a snowball effect to provide a solid financial foundation for my future during and after law school. Having the savings was a huge accomplishment in my mind.
What I learned in my first four years of working was that I could live on very little. I also learned that I could be perfectly content on very little. That is a message that I have carried through with me my entire career and has helped me avoid lifestyle creep.