The Wall Street Journal recently reported that most students with loan balances over $50k failed to reduce this outstanding principal balance after four years. In spite of their payments made over that four year period, that money was used entirely for interest. The article further states that their student loan balances actually rose an average of 5% over that time. These folks were not only not keeping pace, they were actually falling further behind!
We can go on for days discussing college major employability and the difficulty graduates are encountering when seeking employment after graduation, but that is a topic for another day. Instead, let’s talk about those who graduate with an undergraduate degree carrying the national average of $37k in student loan debt and who find employment immediately, earning the national average of $50k. Additionally we’ll assume a student loan interest rate of 4.45%.
Using Excel, we can quickly calculate this using the =pmt() function. In this case our formula looks like =PMT(0.045/12,60,37000), which will give you a result of approximately $689 per month. Alternatively, you can do this the hard way by preparing an amortization table like I did:
Want to see how the Excel magic works? Check out my snippet over here.
So now we know that we need to pay $689 per month over five years. And your stomach turned, wondering how you could ever possibly afford that, right?
How can we make this a more realistic goal?
Consider this: your salary isn’t going to be stagnant over these five years. You’re fresh out of school, you’ve got a ton of energy, and you’re motivated to work hard to prove yourself to your employer. In return, you’ll earn raises and promotions. Let’s assume a 5% annual raise your first five years and see how we can use this to our advantage to make this a more realistic goal.
At a $50k starting salary with 5% raises annually, your average annual raise will be $2,694 or $224 per month. We can use this to our advantage by starting at a more reasonable monthly payment, and then ramping it up over time as we earn those raises.
Back to the Excel machine!
With a few adjustments, we’re able to really turn this into a more realistic plan. By committing our annual raises towards the loans, we can start at just $500 per month. Each year at raise time, pay an extra $100 per month until you hit year five. At that point you will cap out at $900 per month until the loan is fully repaid.
That’s a lot better, right?!
How can I possibly pay $500 per month on an entry-level salary?!
This will be no small feat, but it is achievable and you can do it! It’s important to set good saving and budgeting habits early and stick to them. See my post on saving and discipline for better perspective on how you can turn this into your reality.
This article assumes you already have an emergency fund and that you’re receiving your full employer match on 401k contributions (it’s free money!)
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