Making money moves

Hi friends,

So today I’m going to deviate from flowers for a minute to chat more about my money post from IG this week. If you saw my post, you know that I just finished paying off my $55,000+ student loan debt after eight years! Whoop whoop!

I got some messages asking how was I able to pay it all off early, and while it’s not TOO complicated, I want to explain a few things I didn’t know in the beginning. Plus, I think it’s really important to talk about these money things that we all want to sweep under the rug but can’t afford to :)

Like many college students, I had to pay my own way through college, which meant lots of crushing student loan debt. To be fair, I lived the first two years of college like it was free money (oops). I worked part time sophomore and junior year, but had a demanding unpaid internship senior year. I definitely could have been smarter with my money and found other ways to make it, but it is what it is! I really wish they had helped us understand loans in high school BEFORE we took on so much debt.

BEFORE YOU READ FURTHER, please note that I am not a financial expert and what worked for me may not be best for you :)

Believe it or not, I paid off my loans by making the minimum payments to the lender the entire time. For me, that was $425/month (gasp) automatically withdrawn from my account. HOWEVER, I was making my own “payments” on the side.

What I mean by this is that every time I had some extra money to save, I’d contribute it to a separate student loan account of my own. I’d keep squirreling money away bit by bit until I could make a large lump payment to the company, usually $10,000-20,000 at a time (yes, it took me years to save up these lump sums).

THE IMPORTANT PART: The reason I did this instead of simply making higher monthly payments was so that I could control where my dollars were going. If I were to have paid $525/month to get ahead, that extra $100 would automatically first be applied to the interest on the loan, not my principal balance. When your money goes to the interest alone, you’re not chipping away at the core loan and it keeps growing like a nasty monster that gets harder and harder to slay.

For example, by saving up the $20K and making that one lump payment, I saved $12,000 that I would have paid in interest alone. There are lots of loan amortization calculators online that can help you see how payments will affect your final balance. I like THIS ONE because you can play with making extra payments and see the schedule of your loan and how much of each payment will go to principal vs. interest.

The other thing I didn’t know but that changed my life was understanding that lenders will NOT apply your payments to the principal unless you specifically ask them to via a formal letter and check mailed to them via snail mail. Like, with a stamp. Such a pain. But that’s how they make money—by banking on you not doing that.

I didn’t want to have to do that every month, which is why I decided to save up chunks at a time. Once I saved up a decent amount, I sent a letter requesting that the payment be applied to the principal, a check that stated the same thing on the memo line, and a note that requested that they respond to my letter via mail or email confirming that they received my payment and applied it to the principal. You can download a sample letter HERE that explains what to say.

In the long run, even though it takes hard work and more discipline, paying your loans this way can make a big difference in the total amount you pay over time.

Hopefully this helps and good luck my money mavens.

Did you learn something new? Let me know in the comments!

Elizabeth SmithComment