Success Story: Digging out of student debt in a hurry
Two years after earning a master’s degree, Allie Sharkey had paid off $20,000 in student debt.
“I just felt like I had this cloud over me,” says Sharkey, 25, who lives in Morristown, N.J., and works as a marketing coordinator for a technology consulting firm. “I wanted to pay it off as quickly as I could.”
Sharkey attended Fairleigh Dickinson University in New Jersey, where she was in an accelerated program that allowed her to earn a bachelor’s and a master’s degree in psychology in five years instead of the typical six.
She had the stereotypical college experience that included living on campus and rushing a sorority, and she also worked part time as a nanny and played field hockey.
Although she had scholarships, after graduation she found herself facing five different loans with annual interest rates ranging from 6.00% to 6.80%. Plus, Sallie Mae had sold two of her loans to the U.S. Department of Education.
It seemed like a lot to keep track of, Sharkey says.
She immediately applied a $7,000 graduation gift from her grandfather to the balance, even though it was during the six-month grace period most lenders give new grads.
That smart move wiped out the two loans with the Department of Education. Sharkey chose those simply because she wanted to see a statement with a zero balance, which she printed as a reminder of what her end goal was for all she owed.
“That helped give me a boost to motivate myself to pay the rest off as quickly as possible,” she says.
When Sharkey saw the minimum payment from Sallie Mae was only $165 a month, she recalls thinking, “I’m going to be paying this for the rest of my life!”
She didn’t want to feel like she was only paying the interest. She wanted to take a big whack out of the principal, too.
So Sharkey decided her monthly payment would always be between $500 and $800, the latter of which was more than four times the required minimum.
It was a significant portion of the new grad’s income, yet still manageable with her other bills, which included commuting expenses and rent for the house she shares with three roommates.
One noteworthy payment she didn’t have was for a credit card.
Sharkey didn’t even apply for her first credit card until she had only about $4,000 left to pay on her student loans, because she didn’t want to add a credit card payment to the monthly mix of bills.
(When she uses it, she pays the balance in full each month.)
Although Sharkey put 3% of her income into a 401(k) plan where she works, she realized that she’d have to put any other savings on the back burner.
To keep herself motivated, Sharkey put aside a little each month to buy something she really wanted.
She also managed to take a vacation — an all-inclusive jaunt to the Bahamas. She, of course, shopped around to find the best deal.
“I did manage to squeeze some fun in!” she says.
As time went by, Sharkey realized that she was paying off her debt even faster than she anticipated. So she stepped things up — consistently making $800 payments — in hopes of having those student loans paid off before 2012.
“I made it my resolution to go into the new year completely debt-free,” she says.
As the end of 2011 drew nearer, Sharkey began cutting back other expenses even more in order to pay closer to $1,000 a month.
“December 2011 was not a fun month for me,” she says.
The result, however, was gratifying.
“Not many people my age can say that they don’t have any debt from school,” Sharkey says.
She admits splurging a little during the first two months without a student loan payment, buying new clothes and taking a couple of weekend getaways.
“That was my treat to myself for going into the new year debt-free,” says Sharkey, adding, “You enjoy it more to when you hold back and do get the chance to treat yourself.”
Her original plan was to buy a new car once her student loans were paid off, but she quickly realized that she’d essentially be swapping student loan payments for a car payment.
Her current car was a gift for her 17th birthday. Although it’s nearly nine years old, it gets good gas mileage, and she hasn’t had to dump a lot of money into it for anything beyond general maintenance and insurance.
“I’m just going to run this car into the ground,” she says.
She decided to keep that “extra” money she has each month and has become more frugal than ever in order to build up her savings and eventually ramp up the amount she contributes to her 401(k).
“Now, I’m into this crazy savings plan,” says Sharkey, noting that she deposits the same loan payment amount into her savings account. Her goal is to stay on this hyper-savings plan for two years.
Sharkey admits that this limits her social life to just a couple of dinners out each month with girlfriends, cheap weekend escapes she finds on daily deal websites and group activities like bowling.
“Morristown is a very fun town with lots of restaurants and bars, so it’s hard to resist sometimes,” she says.
She acknowledges that without her grandfather’s gift, she wouldn’t have been able to be student-debt-free by 2012.
Sharkey also credits him for her financial smarts. He never had debt and always advised her to “never owe anyone anything.”
“He just worked hard and saved and created a very nice nest egg for himself,” she says. “He instilled that in me.”
Sharkey offers the following tips to other 20-somethings with student loans they’d like to pay off sooner than later:
Create a budget. Sharkey was surprised how much was left after deducting her expenses from her income. She was careful not to fall into a cycle of eating dinners out and treating herself to other such niceties, knowing that an extra $20 to $50 a month adds up when paying down interest.
Set a realistic time frame for paying off student loans. “That just encourages you to want to save more.”
Ignore the grace period. Those six months are an opportunity for paying at least a couple hundred dollars toward student loan debt. “A lot of people think it’s a freebie. They just go crazy; they don’t put anything away.”
Set your own payment. Pay more than the minimum each month to work on the principal and to see encouraging results.