Getting Geared Up for the New Year 2017… Already?
Paying off debt quickly is probably the most difficult thing there is to do. Yet it’s also one of the most important. Why? Well, that’s what I want to show you guys today. You see, in 2017 all of our student debt will officially be out of deferment. Once I have graduated from my Masters program, we’ll have a six month “grace period” before minimum payments on our loans begin.
YIKES! As you may know, my wife and I have a LOT of debt. A lot. Which is kind of an understatement. Starting at almost $200,000, we were in way over our heads (you can see how we racked up all this debt by clicking HERE). So, the thought of them ALL coming out of deferment can be pretty overwhelming.
Now, my wife and I are working to pay these off as quickly as possible, but many people have asked what it will look like for us in 2017 when our loans are no longer in deferment. It’s an interesting question for us because it’s something we’ve thought about a lot, but it’s also a GREAT question for you all because it gives me a chance to talk about how important it is to pay more than the minimum payment.
If you didn’t already believe in the importance of an extra ten bucks, you will after today!
Gearing Up for 2017… Already?
We started preparing for 2017 back in October of 2015. We were just coming off of the high of our wedding day, loving our lives, living the dream of our honeymoon. We had settled back into our home and were starting up our every day lives again. All was well.
That’s when we did some calculations and made the realization: we have more debt than we ever expected.
We both knew that we had a decent sum of debt. We both had a rough estimate of our own debt. We had talked about debt and finances. We knew we had a lot. Basically, what I’m saying is: this shouldn’t have been a surprise. The problem was that we never truly did the calculations until this moment. It was just a figure floating in the sky, but once we saw it in black and white, it became more real.
When we saw the figure, we began truly planning for 2017, knowing that my debts would be out of deferment and that we simply could not manage all of the payments. We began planning and working toward the day when the minimum payments would be due.
And that’s what brought us to today.
2017: Paying Only the Minimum Payments
Let’s start from the beginning of 2016 for this estimation. Let’s say that we began January 1, with out hefty load of $185,696.02 in debt.
At this point, we were making minimum payments of
- $66 – Credit Card 1 ($3,500)
- $130 – Credit Card 2 ($3,700)
- $40 – School Loan ($2,500)
- $468 – Federal Loan ($68,000)
- $139 – Car Loan ($5,100)
Which comes to a total of: $843 per month for minimum payments.
At this rate, it would take us 260 months (or a little over 21 years) to pay off the debt that’s OUT of deferment – remember, this is not including the debt currently deferred.
Even if we use the snowball method and only put extra toward debt once a debt is paid off, it would take us a total of 145 months to pay off (over 12 years).
In either scenario, we will continue making these minimum payments for a long, long time. Here’s what the minimum payment schedule looks like (if we add do the debt snowball method without upping the total monthly payment of $843).
- Car – 41 months
- Credit Card 2 – 49 months
- Credit Card 1 – 56 months
- School Loan – 58 months
- Federal Loan – 145 months
This means that when our other debts enter repayment, we will need to continue making both sets of minimum payments. So, the big question is, what will our minimum payments look like?
- $500 – Federal Loan 2 ($80,000)
- $300 – Private Loan ($32,000)
- $40 – School Loan 2 ($3,000)
Not to mention the fact that interest has not been calculated for these two up until that point. Basically, our minimum monthly rate will sky-rocket to a whopping total of $1,683 per MONTH.
It also is important to note that both Federal loans are on a graduated plan. After a few years, the minimum payments will rise.
From the looks of it, we won’t be able to afford our minimum payments once they are all due. Thus comes scenario number 2:
2017: Paying MORE than the Minimum Payments
This is what we are currently doing and you’ll soon see why. As we noted before, our current minimum payments come to $843 (as of January 1, 2016). Now, let’s assume that we can put some extra toward our debt each month.
Let’s first look at how this changes our timeline (and then I’ll tell you some awesome stuff):
- Only minimum payments = 207 months to debt freedom (including debt that is currently in deferment)
- Add $10 = 193 months to debt freedom (that’s over an entire year gone!)
- Add $50 = 184 months to debt freedom (almost another year!)
- Add $100 = 175 months to debt freedom (this saves us over $67,000 in interest!)
- Add $300 = 147 months to debt freedom (over 50 months of payments saved!)
- Add $500 = 128 months to debt freedom
And so on and so forth. Basically, the higher the addition to the minimum payment, the quicker we will pay back our debts and the less interest we will accrue!
So, what about that awesome thing I was tell you about?
Well, we’ve already started putting extra toward our debt. In fact, we put a total of $1,700 extra or MORE toward our debt each month. Every windfall goes to debt, every extra payment goes to debt, bonuses, etc. All toward debt and it’s PAYING OFF.
So far we have paid off our credit card debt entirely! Not only that, we have brought our private loan down to $24,000 (from $32,000) just since January 1!
I know what you are thinking: why are we paying on the private loan that is in deferment instead of the federal loan, car loans, or school loan that isn’t? That’s a simple answer, my friend. The private loan has a super high interest rate of 9%. We want to kick that sucker out of here before we ever make a minimum payment on it.
That’s the plan.
We will pay off the private loan before it goes out of deferment. What else? We also plan to pay off the two school loans before then too. And, if we really work at it, maybe even the car loan. That’s the goal.
So, what would our minimum payments look like in 2017 if we reached our goal?
- $500 – Federal Loan 2 ($80,000)
- $468 – Federal Loan ($68,000)
Which comes to a total of $968 per month. Not too bad, right? Sure, its a little higher than what we pay now, but if you figure the difference between this and the over sixteen hundred we would have been paying, it’s pretty great.
Not to mention our debt payoff date which changes drastically. Before I share it with you, I need to note that my wife’s place of work is awesome and if she sticks with them for another year (which she will) she will have $50,000 of her loans forgiven. If she stays another year after that, they’ll forgive another $20,000. And so on. I will be taking this into account in this debt payoff simulation.
Here are our new payoff dates:
- Only minimum payments: 118 months
- Extra $200: 92 months
- Extra $1,200: 45 months
Wow! By paying on our debt with everything we have, we could be debt free in just under 5 years, but if we stick with the minimum payments for the entirety of our loans, we’ll have them for almost 20 years. That’s a HUGE difference (and one that I certainly don’t want to test).
Gearing Up for the New Year 2017… Already?
So, is it worth it to pay more than the minimum payment on our debts? Is it better to just keep our payments low and have them forever? I’ll let you decide for yourself.
For us, we want to experience what debt freedom will be like and that means putting our all toward paying off our debts for good.
Can we do it? We don’t know, but it is certainly worth a try, isn’t it?
How are you preparing today for a better 2017?
Leave your response in the comments below!