Douglas Olsen
Michelle Schroeder-Gardner, the founder of Making Sense of Cents, shares her journey of paying off her $38,000 student loans. In her blog, she discusses personal finance tips, side hustles, and strategies to make extra money. Michelle's story inspires those seeking advice on student loan repayment, offering insights on calculating total debt, managing interest, and exploring additional income streams to accelerate repayment. Through freelancing and dedication, Michelle achieved financial freedom from her student loans, providing a roadmap for others facing similar challenges.
| Characteristics | Values |
|---|---|
| Founder of Making Sense of Cents | Michelle Schroeder-Gardner |
| Total student loan debt | $38,000 |
| Repayment plan | $7,000 per month for 6 months |
| Freelancing side hustles | Yes |
| Interest | Charged interest on the loan for the day until the actual payment was received |
| Worked full-time | Yes |
| Pay extra | $25 |
| Consolidating student loans | Considering |
| Pay off loans | Best thing for financial future |
| Keep an account open | Apply for credit cards and never use them |
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What You'll Learn
Calculate total debt
To calculate your total student debt, you will need to consider the following:
Loan amount
This is the total sum of money you have borrowed or wish to borrow. It is the original balance of your student loan.
Loan term
The loan term is the amount of time you have to pay off the loan. This can be calculated in years or months. Inputting the loan term in years will automatically calculate the term in months.
Interest rate
The interest rate is the amount of interest your lender charges you to pay on the loan each year. Federal student loans tend to have some of the lowest interest rates, and they do not require cosignatories. Private student loans tend to have higher interest rates, and interest accrues for the life of the loan.
Grace period
The grace period is the time between the date of graduation and the date that repayment of the loan must begin. For federal loans, this is typically six months. During this time, interest will accrue on the loan.
Repayment plan
You can calculate the impact of extra payments on the interest you pay and your repayment timeline. You can also reconfigure your monthly payment to lower or reduce the total amount you owe.
Subsidised vs unsubsidised loans
Direct subsidised loans are need-based and dependent on the Expected Family Contribution (EFC) to determine the loan amount. They are subsidised, so there is a grace period after graduation before interest accrues. Direct unsubsidised loans are not need-based, and interest accrues immediately.
Monthly payments
If you can afford to pay more than the minimum each month, you will pay off your student loans faster and save money in interest.
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Understand interest accrual
Understanding how interest accrues on your student loans is crucial when it comes to making informed financial decisions. Student loan interest typically begins to accrue daily right after the loans are issued, which means that borrowers usually end up paying more than they originally borrowed. This interest accrual starts on the day your loans are disbursed, and it can occur even during a grace period or deferment, depending on the type of loan you have.
For instance, if you borrow $10,000 with an annual interest rate of 3.65%, and repayment starts a year later, you will accrue $1 in interest per day, totalling $365 by the time repayment starts. If you don't pay off this accrued interest before the repayment period begins, it will be capitalized, increasing your principal amount and, consequently, your daily interest. This is known as negative amortization, where the total amount you owe increases as you repay your loan because the interest charges are added to the principal.
The type of loan you have determines the specifics of interest accrual. With subsidized federal loans, the government pays your interest during certain periods, such as while you're enrolled in school or during a grace period. In contrast, with unsubsidized loans, interest accrues during these periods as well, and you are responsible for paying it. For Direct Loans and other federally-owned loans, interest capitalization occurs after a deferment on an unsubsidized loan or if you no longer qualify for income-based repayment plans.
It's important to note that there are two primary types of interest rates: fixed and variable. A fixed interest rate remains constant throughout the loan's life, while a variable interest rate may fluctuate based on changes to the loan's index. Understanding these nuances can help you make strategic decisions about repaying your student loans and potentially save you money in the long run.
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Make extra payments
Making extra payments is an effective way to pay off your student loans faster. Even if you don't have a lot of extra money in your budget, every little extra payment helps. Michelle Schroeder-Gardner, the founder of Making Sense of Cents, was able to pay off $40,000 in student loans by the age of 24, largely due to her freelancing side hustles.
So, look for ways to make some extra income, whether it's through a side hustle, a freelance gig, or a part-time job. Then, put that extra income directly towards your student loans. Even an extra $25 a month can make a big difference in the long run.
If you can, try to make more significant extra payments. For example, if you get a tax refund or a bonus at work, consider putting that money towards your student loans. The more you can pay above the minimum monthly payment, the faster you'll pay off your loans and the less you'll pay in interest over time.
You can also try to find ways to reduce your expenses so that you have more money to put towards your loans. Cut back on unnecessary spending, such as eating out or subscription services you may not need. Look for coupons or discounts when shopping, and consider negotiating your existing bills to get a better rate. All of these small changes can add up and give you more money to put towards your student loans.
Remember, the key to paying off your student loans faster is to make consistent extra payments whenever you can. So, review your budget, find ways to increase your income or reduce your expenses, and put that extra money towards your loans. You'll be surprised at how quickly you can make a dent in your student debt.
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Side hustles and income
Michelle Schroeder-Gardner, the founder of Making Sense of Cents, is passionate about personal finance, side hustles, and making extra money. She paid off $40,000 in student loans by the age of 24, primarily through her freelancing side hustles.
Side hustles are a great way to boost your income and pay off student loans faster. If you're looking to increase your income through side hustles, here are some ideas to consider:
- Freelancing: Freelancing is a great way to turn your skills and expertise into a side income. Whether you're a writer, designer, developer, or marketer, you can offer your services to clients on a freelance basis. Freelancing gives you the flexibility to work on your own terms and can often command higher rates than traditional employment.
- Online businesses: Starting an online business can be a lucrative side hustle. You can create and sell digital products, such as online courses, e-books, or software. You can also explore e-commerce options, such as dropshipping or selling handmade goods through platforms like Etsy.
- Tutoring or teaching: If you have expertise in a particular subject, you can offer tutoring services or teach online courses. This can be a great way to earn extra income while also gaining valuable teaching experience.
- Ridesharing or delivery services: Driving for ridesharing companies or delivering food and groceries through apps can be a flexible way to earn extra money on your own schedule.
- Renting out your assets: Consider renting out your car, spare room, or property through various platforms. This can provide a steady stream of income with minimal effort.
When considering side hustles, it's important to find something that aligns with your skills, interests, and time availability. Remember that even small amounts of extra income can make a significant impact on your student loan repayment journey.
Additionally, it's crucial to manage your side hustle income effectively. Consider creating a budget that includes allocating a portion of your side hustle earnings towards your student loan payments. By combining a side hustle with smart financial strategies, you can accelerate your progress in paying off your student loans.
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Student loan repayment plans
Paying off student loans can be a daunting task, but with a solid plan and dedication, it is achievable. Here is a step-by-step guide to creating an effective student loan repayment plan:
Calculate Your Total Debt
The first step is to calculate your exact student loan debt. Use a student loan calculator to add up the total amount you owe, including any accumulated interest. Knowing the precise figure will help you strategize and stay motivated throughout your repayment journey.
Understand Interest and Repayment Plans
Interest accrues daily on most student loans, often starting from the day the loans are disbursed. Federal loans may offer subsidized interest, where the government pays the interest while you are enrolled in school or during a grace period. Unsubsidized federal loans, on the other hand, may capitalize interest after a grace period or deferment. Understanding these nuances is crucial for managing your debt effectively.
Set a Repayment Goal and Timeline
Define a clear repayment goal, such as Michelle Schroeder-Gardner's goal of paying off $38,000 in student loans. Then, set a realistic timeline for achieving this goal. Be ambitious but also ensure the monthly payments are manageable within your income.
Increase Income and Make Extra Payments
Consider increasing your income through side hustles or freelancing. This extra income can make a significant difference in your repayment journey. Even small extra payments can help reduce the loan principal faster and decrease the overall interest you pay.
Consider Consolidation or Refinancing
If you have multiple student loans, consolidating them into a single loan with a fixed interest rate may simplify your repayments and reduce your overall monthly payments. Refinancing your student loans can also help you secure a lower interest rate, saving you money over time.
Manage Your Credit Score
Maintaining a good credit score is essential, especially if you plan to take out other loans in the future, such as a mortgage. While paying off your student loans can positively impact your credit score, closing the account may negatively affect it. Consider keeping the loan account open by making small, additional payments to avoid negative impacts on your creditworthiness.
Creating a student loan repayment plan requires a comprehensive understanding of your debt, interest rates, and repayment options. It also demands discipline and a strong motivation to become debt-free. By following these steps and adapting them to your unique financial situation, you can successfully tackle your student loan debt.
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Frequently asked questions
Calculate your total student loan debt, then work out how much extra you can afford to pay each month. Even an extra $25 can make a difference. Consider taking on a side hustle to boost your income.
Interest accrues daily, so the faster you pay off your loan, the less interest you will pay overall. If you have a subsidized federal loan, the government will pay your interest while you're enrolled at least half-time in school or during your post-school grace period.
Keeping a loan open can help your credit score, but it's generally not worth the extra interest you'll pay. You can keep another type of account open, such as a credit card, to maintain your credit score.
