Over the years, I have found that in business, having a strong strategic vision and the discipline, desire, and dedication to execute it can mean the difference between success and failure. I thought about that this past weekend when Jill and I visited our friends, Hal and Mia. They had a cookout to celebrate their daughter Gwen’s college graduation.
I have known Gwen since she was born and it has been a pleasure seeing this young lady grow up. Gwen was a top student in her graduating class and has already landed her first post-college job at a cool tech startup in Cambridge, where she’ll begin her employment next month. What’s more, the position is in her field. Some would say she is lucky. I don’t really believe in luck per se. I believe luck is where hard work and discipline connect.
Gwen is moving in the right direction to execute the strategy she envisions: the transition from college life to working life, gearing herself for success. It’s the way she’s comported herself ever since she started college, which seems like yesterday. At the cookout, I commended Gwen for her strong work ethic and laying such good habits early. I even added a favorite quote from one of my heroes.
“Most behaviors are habitual,” I said. “The chains of habit are too light to be felt until they are too heavy to be broken…”
“Warren Buffett,” she said.
Hmmm . . . She is a smart one.
Like almost everyone her age, Gwen’s biggest concern right now is minimizing her student debt. Student loan debt continues to be on the rise. In fact, student loan balances increased by $29 billion for the first quarter of 2018. Student loan debt stood at $1.41 trillion as of March 31, 2018, according to the Federal Reserve Bank of New York.
In her case, Gwen graduated with about $30,000 in accumulated student debt between federal and private student loans, which is pretty average for students in Massachusetts, according to the Institute for College Access & Success. Her payments start in the next few months.
At a combined interest rate of 7%, Gwen will be paying about $350 a month for the next ten years before she’s finally done. That’s a significant weight to carry for a long time.
Since Gwen’s already developed some great habits to save money, I asked if she knows how to shave time and interest off a loan repayment without refinancing. I explained to Gwen that refinancing and consolidating student loans might be an appropriate option for her in the future once she’s developed a work and credit history that will get her favorable terms with lenders, but in the interim, it’s smart to tack on a few extra bucks to every payment.
You see, over time those extra bucks make a huge difference. Sallie Mae, the nation’s largest student loan company, even notes this on its website. Just paying an extra $25 per month will save Gwen almost $1,200 in interest over the course of that loan. She’ll also have her loans paid off a year earlier.
To do so, Gwen will need to write a letter to her lenders to tell them how any extra amount she sends them is to be applied. In fact, The Consumer Financial Protection Bureau has provided more details and a sample letter to explain how to start this process. Without it, extra payments she makes may end up only credited to future payments.
Gwen’s federal loans have some consumer protections, that her private loan does not provide. There are no forbearance or deferment protections, for example. Her private loan also carries a higher interest rate than the federal loans.
So, it may behoove Gwen to unburden herself of that private loan debt sooner. After all, that private loan is the most expensive money Gwen borrowed. Paying back that debt faster means more money saved in interest. The debt avalanche method is what I’m talking about.
The alternative, the debt snowball method, is to chip away at small debts first regardless of interest rate. Gwen will see faster results that way, but the debt avalanche method pays off debt faster in the long run.
Another reason to focus on repaying the private loan sooner than the federal loan is that Gwen plans to go back to school for a graduate degree at some point. If so, she may be able to defer repayment of outstanding federal loans if necessary. She’ll still be responsible for paying interest on some types of loans, according to the Department of Education, but it will be easier debt to manage while she’s back in school.
With strategies like that, Gwen may be able to save herself a lot of money. And with the discipline of paying her bills on time using automatic debit payments, all of Gwen’s federal loan lenders will give her a 0.25% interest rate reduction. So will her private lender, which is one of many that does. Although 0.25% may not sound like a lot, over time, it adds up.
This brings me to another comment once made by Warren Buffett: “Don’t save what is left after spending; spend what is left after saving.”
Regardless of what happens tomorrow, Gwen must budget today to save a little each paycheck, even if it’s just a small amount. This will help protect her during those times when she might come up against any other unforeseen issues.
You have heard me say it many times – saving should be an essential part of your budget at any age. Because life comes at you fast, especially just out of school, and it pays to be prepared.
Gwen is an excellent demonstration of what I’m talking about – her parents did a great job helping her implement a financial vision to succeed in life just like she did academically. And now, after our chat, she’s determined to pay off her student loans and reach her goals. With her desire and dedication, she’s going to get there.
You know, driving home that night I had some time to reflect on kids these days and the financial headwinds they face. Heck, I had my three snoring in the back seat. I also thought about the responsibility we as adults have to help shape their financial visions in life. From that vision, we can help them cultivate a desire, determination, and dedication for them to be financially successful no matter what life throws at them.
Folks, together we can teach these kids to be vigilant and stay alert because don’t they deserve more?
Have a great week!
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC. A wealth management firm with offices is Falmouth, Duxbury, and Mansfield. Jeff can be reached at firstname.lastname@example.org.
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