5 steps for millennials to pay off student loans
Millennials are no strangers to debt. Chronic student loans have engulfed this generation.
The nations’ student loan debt has ballooned to over $1.5 trillion, the highest in U.S. history, while late fees and calls from lenders have sadly become the new normal. With the weight of student loans carried by people in their twenties and thirties, long-term debt is now delaying life’s major milestones for many millennials.
So, what are millennials to do?
Here’s a new approach to paying off student loans. As the most educated generation, millennials should consider these five S.M.A.R.T. steps.
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Step 1: Small balances first
Student loans can be daunting. In 2017, the average four-year undergraduate left college with $28,500 in loans and the typical graduate degree holder left with $57,600.
Their sheer size tends to overwhelm even the most seasoned personal finance experts, but you can address them.
To do this, you need to concentrate on paying off the smallest balances first. According to researchers at Northwestern University's Kellogg School of Management, paying off the smallest loan first makes borrowers more likely to pay off their total debt balance.
By focusing on paying off your smallest loan first, this can give you the psychological wins needed to propel you toward financial success.
Step 2: Pay more than the minimum
As you concentrate on paying off your smallest loan first, begin by paying more than the minimum due.
This is where budgeting, financial planning and sound financial behaviors come into play. Muster all of your resources to pay more than the monthly minimum: earn extra income, start a side hustle, or downsize your lifestyle.
What about your larger loans? You still can’t lose sight of your larger balances. For those loans, keep them at bay by paying the monthly minimum to ensure they don’t balloon out of control.
Step 3: Earn more money from existing assets
Millennials are highly entrepreneurial. It’s time to unleash that generational spirit. Find a way to do two things in your financial life: cut expenses and increase your income.
Having exhausted the ways to cut your expenses, you should begin focusing on how to increase your income by extracting value from assets you already own.
Take an inventory of your collective skill sets and assets. Put together a strategy to earn extra income. Whether it is renting your apartment on Airbnb, starting a blog, or driving for Uber or Lyft, the shared economy is here to help. Once you begin earning this extra money, put it towards paying off your student loans.
Income matters. There is a strong relationship between income and wealth, especially for millennials.
Step 4: Reward yourself
Celebrate your wins. The journey to paying off student loans can be long. Developing good habits is vital. Each time you achieve a major money milestone, reward yourself.
Building up these small wins can increase your overall motivation.
Create a ritual for when you pay off a student loan, whether it’s consuming an expensive cappuccino, attending a concert with friends, or dining out at the nicest restaurant in town. The more cadenced the reward, the better.
Step 5: Develop your debt-free timeline
How quickly do you want to eliminate your student loans? Will it take you three months, twelve months, or four years? Analyze your incomes and expenses over the next year and calculate how much you can put towards your student loan payments.
Once you have determined how long it will take you to finish paying off your student loans, write down that date. Place it somewhere prominent. This is your debt-free date.
By paying off student loans the S.M.A.R.T way, you can free up your monthly cash flow to tackle other essential money matters, achieve financial goals and start enjoying life student-loan free.
Ask The Millennial: Have a Personal Finance question? Contact Conor at AskConor@MillennialMoneyMakeover.com.
Conor Richardson is the author of Millennial Money Makeover and founder of MillennialMoneyMakeover.com, where he helps millennials tackle essential money matters. Follow Conor on Twitter or Facebook.