January 12, 2020

How I'm Paying Off My Law School Debt Year 2

Law School Student Loan Debt Repayment Plan Timeline | brazenandbrunette.com

New year, same debt! This is Part 2 and you can read Part 1 from last year here. 

So I had shitty interest rates on my original law school loans and now I don't! Truly living the American Dream :) Some quick stats, this is what I currently owe...


How I paid off $15,000 of student loans in one year | brazenandbrunette.com


I know that seems like a lot but I'm actually making a pretty big dent in it. Here's a roadmap of everything I did in the past year that has helped me pay off my law school debt faster.


January 

Refinanced loans #1. I refinanced my public loans (quick recap-- I had both private loans through Sallie Mae and government loans through my FASFA) last year. This dropped my interest rate down by a full 2-2.5% since I refinanced 3 separate public loans and each loan had different rates. My loans had only become due in November so I refinanced them as quickly as possible so that I wouldn't have to restart on the standard 10-year term all over again.

I'm surprised I even got to refinance my loans because I had a "fair" credit score. I basically only got even this slightly better rate because I'm a lawyer. Our profession is actually at the top of the lists of "preferred borrowers" because usually lawyers are paid pretty well. Luckily, my check stubs were enough to show SoFi that I would be able to afford paying the monthly payments. 

Refinancing almost was a no-brainer for me because the risks of refinancing didn't really apply to me. Like I just mentioned, I might not be a Big Law lawyer, but I still made enough that I didn't need an income-based repayment plan. And I didn't go into public law so I was never even eligible for a debt-forgiveness program. And I read theSkimm to know my options when looking at variable vs fixed rates (here's more terms you need to understand).

I set it up to where I paid my private loan (higher interest rate) with my first paycheck of the month and then paid my gov loan (lower interest rate) with my second paycheck of the month. Then I took the difference between my gov loan payment and my private loan payment and paid that on my private loan with my second paycheck as well. Basically, my private loan payment was lower than my gov loan payment but the same amount of each check went to loans. This was just a couple hundred dollars every second paycheck that went to my higher-interest loan because I'm trying to do the debt avalanche approach.

If this is confusing, here's an example (not the real numbers).... Say my private loan is $800 a month and my gov loan is $600 a month. $800 is spent out of every check on loans. So, first check of the month, all $800 would go to private loans. And second check of the month, $600 goes to gov loan and $200 goes to private loan. Meaning $1,000 paid each month total on private loan while gov loan gets paid at a slower rate of $600 a month. Make more sense?

February

Credit card #1. I didn't have a credit card before this point because my mom was always concerned that if I had a credit card before I had a full-time job that I would end up in credit card debt. Now that I understand how credit cards work, I wish I would've gotten one earlier. Maybe I was a little too immature to be responsible with a credit card in college, but I think I would've been able to handle it in law school.

The reason why I'm really focused on the credit card right now is because I'm trying to build up my credit as fast as possible. The biggest way you're going to get ahead with your debt is to be hyper-focused on increasing you credit score because a higher credit score equals lower interest rates. Even though I didn't have that great of a credit score, I thankfully got approved for one! I found mine after an hour of comparing and researching on NerdWallet (and yes, obviously a glass or two of some wine). I decided to get a credit card that gave me cash back rewards and am letting that cash back stock up just in case there comes a time where paying my credit card bill is high. Like an emergency fund in a way.

My credit score actually jumped up 30 points just by opening a credit card because I finally had a line of credit. Before then, all I had was just debt so this helped me out a lot. The rest of my credit score rising has mostly just been making consistent payments on my loans. See how it's all related? Higher credit score leads to better loan rates which leads to paying off your loans consistently and faster which leads to higher credit scores....

May

Raise #1. I say #1 because you bet your ass I'm going to ask for another raise soon. But anyways, yeah I recently found out that it's pretty standard practice for you to get a 6-month raise. Remember that if you're worried about accepting a job offer at a place where the pay is a little low. 

If you're just starting out and don't feel like you don't have a leg to stand on to negotiate a higher starting salary, come back in 6 months. Then, you'll have a track record to show your boss of how you're adding value and bringing in cash money and therefore deserve a little bit more of what you bring in. 

The tip to getting a raise is don't act like you got a raise! Sure I splurged for some nice bubbly to celebrate, but after that it was back to normal. I calculated out how much I would be getting each paycheck after taxes & everything. Then I put reoccurring calendar events in my phone to remind me the day after my paycheck hit to put that much money towards my highest-interest loan. This is just a little extra each month to help get my loans paid off that much faster.

August

Refinance #2. I know most financial articles you read say not to do this, but here's why I considered it. My credit score was so meh to begin with (borderline "poor") that I was able to raise it 60 points in 6 months and go to "good" and then now I'm at the bottom of "very good." 

Once I crossed over into that "very good" category, I decided that now would be a good time to look into this again. That's just because once you get so high it gets harder and harder to increase your score so I knew that this was about as good as it was going to get for a while. I figured if I'm going to hover around this score for the next year, I might as well look into refinancing and start paying less now.

I'm super glad I did! This time I found out about Credible which compares all the different options you're pre-approved for. I looked into the rates and was able to find one that was 3% lower than my original refinance rate (so 5% lower than my original law school public loan) and 1% lower on my public rate. 

I decided just to combine the two because while my public loan was still lower than my private one, it was still kinda high. This did stress me out initially because now instead of having two smaller payments a month, I only have one big payment. When I looked at my refinancing options, I made sure to choose one that was a couple hundred bucks less a month than I could actually pay. This is just because while I am already paying that higher amount and paying more per month would've been a sightly better interest rate, a faster payoff date, and overall savings in interest, it was just too big of a risk. 

I just made sure that my new refinanced loan didn't have a prepayment penalty. So now the plan is to still pay that extra few hundred every month anyways just to get it paid off faster and save overall in interest, but I'm not locked in to that number. If something comes up and I literally can't afford that in my budget, I can cut down to the minimum payment and still be fine. Now what this all means is that in less than a year, I got one of my loans down 5% and the other 1% and have saved about 3 years off my original repayment window. 


September

Credit Card #2. This is getting a little excessive and I don't think you need a second credit card but I want to give y'all the full picture of how I've made money moves this past year. One reason why I decided to get a second credit card was to anchor my credit age. A big part of your credit score is your credit age (remember, I'm obsessed with my credit score now) and one big downside to refinancing your loans is that it starts your credit score all over again for those loans.

To illustrate, before I first refinanced my loans were all 1-3 years old because I was taking out new loans throughout law school. When I first refinanced, I only refinanced my private loans & left my gov loans alone. That erased 3 years worth of private loan age so I had a 0-month old new refinanced loan and a 3-year old leftover gov loan, plus a 0-month old credit card. So the average age of my credit was like 1 year (which isn't that good).

Then when I refinanced again, I refinanced allllll of my loans so that gave me a 0-month old new refinanced loan but now with a 7-month old credit card, plus a 0-month old new credit card. So now my average age of credit has gone down to less than a year (which is bad). But whenever I decide to refinance for a third time, whether that's in a year or three or whenever, I'll have had these two cards anchoring my credit age so it won't be hit as bad. 

I don't recommend getting a second credit card just for anchoring and definitely don't recommend getting a new card every time you refinance your loans, but I was needing a second card and this seemed to be good timing for me. My goal is to use it to eventually help raise my credit score.


October

So this tip isn't loan-payoff related but it is money related so I felt the need to include it here. I opened a high-interest savings account to start an emergency savings. I made a goal to contribute $100 a month (so $50 a paycheck) with a goal of having a $1,000 emergency fund saved up just in case. 

This is SO SO SO important! Imagine your car breaking down or your dentist bill ending up being higher than you thought because of some treatment you need or your pet needing surgery and you're out $1,000. Can you still pay for your rent and your student loans? You don't want a late or missed payment on your credit score, you don't want late fees for your monthly expenses, and you don't want to go into credit card debt and end up paying a lot of interest on a credit card bill.

Once I reach that goal, my goal is to get 3 months' income saved up. This will give me a security blanket in case I ever decide to leave my job of (heaven forbid) I'm let go. Things will be a little easier knowing that I would have 3 months to take my time finding a job that's right for me without getting behind instead of taking a shitty job just because I'm about to default on my loans and be evicted from my place.

Later on, this little side money can be dipped in to if I ever have an emergency that costs over $1,000. Another good option is when I go to buy a house, I can either contribute it to my down payment or at the very least show the mortgage lender that I have a healthy safety net saved up.

But first, baby steps. Set up an emergency savings account and slowly build that up. Then leave it the fuck alone. You're not going to get rich off the interest gained, but at least you are prepared for life like a #adult and you'll get a lil extra money in the end.


November

Again, not loan related, but I'm throwing it in here... November was my one-year anniversary at my job. This made me eligible to contribute to my firm's 401k, and I decided to do so. 

I went back and forth a lot on this hypothetical question-- If I had an extra $100 at the end of the month would it be cost me more in student-loan interest if I invested it or would it cost me more in lost interest if I paid towards my loan. What pushed me over was the book I Will Teach You to be Rich. I randomly decided to buy the audiobook to listen to before an out-of-town hearing and it really helped out (another book I really liked was The Millionaire Next Door). Basically what I got form his book was the average return on investment for a 401k is 8%, so since my loans were now below 8% I figured I would lose more money not investing than paying off my loans quicker. 

At the very least, I highly highly highly encourage you to at least contribute what your employer is matching. Let's say you earn $100k a year before taxes. And let's say your employer matches at 3%. That means if you sign up for 3% with your 401k, you pay $3k a year into your 401k and your work pays $3k a year into your 401k. Yeah that's right, you'll double your money!! Same scenario, but you only contribute 1% ($1k a year), so your work will only contribute 1% a year. That means you just lost out on 2% or $2k a free money because they matched what you put in, but they were willing to go higher. On the other hand, if you were to contribute 6% or $6k, they would still only contribute 3%/$3k because that's their max. But hey, still free money. Go talk to your office manager or HR or a more senior attorney and find out what your work does. 

December

The final step for #adulting in 2019 was I got a Roth IRA and put a little money into it and will also contribute monthly to that. A Roth and a 401k are very similar. Basically the biggest difference is a 401k is taken pre-tax and a Roth is taken post-tax. 

So again let's say you make $100k a year. If you're contributing 3% to your 401k then you actually make $997k a year because they take that out of your paycheck before anyone taxes you. This means that you'll have to pay taxes on it once you take money out of it in retirement, but hopefully you'll be in a lower tax bracket by then and it will have grown so much that the taxes for 65-year old you are nbd. 

Same scenario, so now you take whatever money is in your own checking account once your work direct deposits your check and then you can put that into a Roth IRA. So you've already paid taxes on it. This means when you take it out when you're retired, you don't have to pay taxes on it so it's like free money for future you. The only catch is there is a limit for a Roth. For 2020, you can only put $6k into a Roth.

Why do I do both? Because I want to be one of those little rich old ladies who spends my retirement on wine tours in Italy and cruises through the Hawaiian islands. And because of compound interest. The more I contribute now, the more crazy amount I'll have when I'm older. 

So this about wraps up my 2019 money moves on my luxury-sports-car amount of law school loans. My goal for 2020 is to be even more aggressive and get it down to 5 figures. Or make more than I owe. We'll see which comes first :) 

Debt Payoff Tips

  1. Your income is not your income. Take how much your boss is paying (X) you and subtract how much you need (or want) to pay a month towards your student loans (Y). That is your income. Get into this mindset. Don't think you should be going out to eat all the time and always buying new clothes because you make X a year and can live the fab life. You make Y a year. You can treat yo self occasionally but only after you know your loans are taken care of.
  2. Set up an automatic transfer from your checking to your savings account on the day after each pay check If you don't have a savings account then stop what you're doing and get one now!!! Right now I just move $100 a check or $200 a month, which ends up being $2,400 a year. I really don't notice that money being gone. This is tip #1 because a lot of people get so focused on paying off debt that they forget to save up an emergency fund. Then if something bad happens just once, you're screwed and next thing you know you are being evicted from your place and defaulting on your loans and it's really hard to bounce back from that. Be money smart with more than just your debt.
  3. Celebrate the baby steps. Every $5,000 I pay off my total debt, I get a $20 bottle of champagne (which is a splurge for me) and celebrate! It's really motivating to appreciate how much you've accomplished even if in the grand scheme of your debt it doesn't feel like much. The little $5k payoffs add up to eventually being debt free, so enjoy the ride.
  4. Find your money-wasting triggers. I unfollowed a bunch of people on Instagram because I realized that I was always feeling like I needed more clothes and started coveting designer bags, too. The truth is, I have plenty of clothes and really only need one purse. Once I stopped trying to live their #sponsored life, I suddenly had a lot more room in my budget.
  5. Don't focus on the Big Debt. It's really daunting to look at how much you owe and knowing you'll be spending like a decade paying it off, so I just don't focus on that. I stop myself any time I start to think about all the things I could be spending money on each month instead of paying interest off. That doesn't help so why go there? Focus on doing the best you can with what you got, and it doesn't seem so bad. 
  6. Find one thing that you actually can live without, and do it! For me, as much as I loooove Orange Theory, it did hurt to pay $169 every month! So, I decided to cancel my membership and instead run outside for the low cost of Free.99 and instead put an extra $169 into my loan repayment. And although I still get manicures so I can look professional, I decided to save $60 a month and just do at-home pedicures. I found this nail polish that's really long-lasting and again deposit the savings into my loan. This will save me SO much money in interest by helping me pay off my loans a little faster. Finding an extra $100-$200 in your budget isn't that hard if you monitor where your money goes with an app like Mint or TrueBill.
  7. Stay motivated. You know what's lame but addicting for me? Watching YouTube videos and reading blog posts about people paying off their student debts. It keeps this in the front of my mind and reminds me why I want to get my loans taken care of ASAP. It also helps me re-evaluate my current lifestyle and check where I might be self-sabotaging my debt-repayment plan. I've heard of people making paper chains where each chain represents $1k and cutting off the chain link by link as they make their payments. Whatever works for you, find a way to stay focused on your goals.
  8. Extra money = goal money. If you get a Christmas bonus or a tax refund, just put it straight into paying off your loans without even thinking about it. This is money that you didn't have yesterday and probably didn't plan to have anyways, so your budget can stay the exact same but your debt can be just a lil lower. Do it ASAP before you get attached to the extra money and it burns a whole in your pocket. Remember your goals and stay focused! 

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