The Flaw In The Student Loan System That Will Keep You In Debt Forever

by Kara Perez

I graduated from college in 2011 with over $25,000 in debt and no job. I moved back in with my mom, found a waitressing job and proceeded to discover the joy of working for tips. Spoiler alert: It truly sucks.

I didn't have any real understanding of my debt, besides the fact that it was on me to pay it back. My mother wasn't in a position to help me.

I knew debt was bad, and I knew that I wanted it gone. I knew that $25,302 was a lot of money, and frankly, five years later, I still consider it to be a lot of money.

Since I was living at home, I wasn't paying rent or food costs. In a stroke of brilliance, I decided to pay extra on my loans when my six-month grace period ended. Not a ton extra, but when it comes to debt, every little bit counts.

Making the minimum monthly payments on your student loans is not helping you. It's not making that balance go down. Loan lenders first apply any payments you make to any fees you owe, then your interest and then the principle. If you're only making the minimum payments, probably less than half is actually going to the balance.

Student loan interest also accrues daily. The longer you go between debt payments, the larger amount of interest you will pay. Even if you pay diligently every month, you're fighting against 30 days of interest every time.

You can calculate your daily interest rate by multiplying the interest rate by the total amount owed and dividing it by 365 (the days in a year). So, if you have a $12,000 loan with a 5 percent interest rate it would look like: (12,000) x (.05) / 365 = 1.64.

You're getting charged $1.64 a day in interest. Multiply that by 30, and you're paying $49.20 in interest a month. Multiply that times 12, and on that one loan, you're paying nearly $600 in interest a year.

So, now we see why paying the minimum just isn't cutting it. It's a rip-off designed to make the lenders money off of those interest payments.

I paid off my student loans in three and a half years, all while making under $35,000. In fact, in 2014, I made less than $16,000 for the entire year.

If I can pay off my student loans with that kind of income, so can you. Here are three things I did to do it:

1. Make multiple monthly payments.

I used to make three to five loan payments a month. Since I knew my interest accrued daily, I would make a payment any time I found an extra bit of money in my budget. If I made one payment on a Monday, I tried to make another one on Friday. That way, more of my money went to the principle, since interest hadn't had a full month to grow.

2. Every dollar counts.

I made extra payments as low as $30 and as high as $2,600. Any time I had a little wiggle room in my budget, I sent that money toward debt. I used birthday and Christmas money, as well as my tax refund, to pay down my debt. No matter what size the extra payment you make is, it is helping you out.

3. Apply your extra payments to one loan in particular.

There are two common methods of debt payoff. One is called the debt avalanche method. In that one, you focus all your extra payments on your loan with the highest interest rate, while making the minimum payments on the rest.

The other method is called the snowball method. This one says to focus your extra payments on the loan with the lowest balance. Either route is a good one to take, as they both require you to focus all your extra money on one loan in particular.

Picking off loans one at a time is a good way to see progress faster, since the payments don't get diluted as they're spread across multiple loans. Concentrating an extra payment of $2,600 on a $7,000 loan is going to have a huge impact, instead of seeing $500 go to five loans.

I also recommend calling and speaking to your loan lender. You can change the date of your mandatory payments, set up automatic payments (and may even receive a discount for doing so) and figure out the best way to work within its system. Each lender is unique, so get to know yours well.

I used all these methods myself, and I can say from experience they will make payoff go faster than simply paying the minimum each month. If you want to see some true progress on your student loans, making the monthly minimums won't cut it.

Don't play the student loan lender's game. Switch up your tactics, and start playing by your own rules.