Plan Of Attack: How To Pay Off Your Student Loans In 5 Years Or Less

Do you feel like you’re drowning in your student loan debt?

If so, you’re not alone. The average student from the class of 2016 has over $37,000 in student loan debt.

It’s easy to feel overwhelmed by this much debt, especially when average salaries are a joke these days.

In this article, I’m going to break down a few scenarios to show you that it’s not only possible to conquer this debt, but pay it off in just five years by making some lifestyle adjustments—even if you make little money and have a lot of debt.

First, let’s start with a baseline for the budget we’ll use:

The baseline budget

For the purposes of this article I’ll use this sample budget from Value Penguin, based on data collected from the Bureau of Labor Statistics.

Here’s a look at the budget categories and percentages based on average American households (this is what I’ll be referencing throughout the article).

• Housing—16 percent
• Transportation—14 percent
• Taxes—2 percent
• Utilities and other household operational costs—11 percent
• Food—10 percent
• Social Security contributions, personal insurance and pensions—9 percent
• Debt payments or savings—8 percent
• Healthcare—6 percent
• Entertainment—4 percent
• Cash contributions—3 percent
• Apparel and services—3 percent
• Education—2 percent
• Vices—1 percent
• Miscellaneous—1 percent
• Personal care—1 percent

*To clarify, student loans will fall within the “Debt Payments or Savings” category.

Scenario #1—Student loans: $15k / Salary: $40k

Our first scenario will look at someone who has $15,000 in student loans and is making a modest $40,000 per year salary. Here’s a breakdown of how their monthly spending would come out, based on the above percentages:

• Housing—$533 (16 percent)
• Transportation—$467 (14 percent)
• Taxes—$400 (12 percent)
• Utilities and other household operational costs–$367 (11 percent)
• Food—$333 (10 percent)
• Social Security contributions, personal insurance and pensions—$300 (9 percent)
• Debt payments or savings—$267 (8 percent)
• Healthcare—$200 (6 percent)
• Entertainment—$133 (4 percent)
• Cash contributions—$100 (3 percent)
• Apparel and services—$100 (3 percent)
• Education—$67 (2 percent)
• Vices—$33 (1 percent)
• Miscellaneous—$33 (1 percent)
• Personal care—$33 (1 percent)

*The math on this simple – just take $40,000 and divide by 12 (months), then assign a percentage to each category.

The first thing I’ll say is this sample budget is not exactly frugal OR ideal – but it gives us a starting point. If you see above, I’ve bolded your area for debt payments – which comes out to be $267 per month. If you followed this budget perfectly, that’s how much you’d have to put toward debt (in this case, student loans).

Now you can obviously see some of these numbers are hard to agree with. The main one that stands out to me is housing. Unless you have a roommate, I don’t know how you’re spending only $533 on rent or a mortgage. Perhaps you are, but I’d adjust this upward a bit for realism.

Now, let’s take a look at what this debt would cost you to see if your budget would work. I’ll be using 3.76 percent, which is the current rate for undergraduate loans.

Using this tool, I plugged in the numbers for the debt with a five-year repayment plan. Here’s what I got.

• Loan balance: $15,000.00
• Interest rate: 3.76 percent
• Loan term: five years
• Monthly loan payment: $274.63
• Cumulative payments: $16,477.55
• Total interest paid: $1,477.55

According to our budget, we had $267 each month for debt payments. This is only slightly higher, so assuming you can tweak the percentages slightly, you should be able to afford this payment and pay the debt off in five years.

Again, you may have to adjust for housing specifically, because it seems low. But in general, if you can follow this budget closely, this debt repayment shouldn’t be an issue.

The big loss, though, is that you’re not putting away anything in savings. I’d strongly suggest tapering back things like food costs, entertainment, and vices (things you don’t really need) in order to stash some savings.

Scenario #2—Student loans: $40k / Salary $40k

As you just saw above, we barely made the cut with a $40,000 salary and $15,000 in student loans. But the honest truth: Only having $15,000 in student loan debt is unrealistic.

The average student loan balance for the Class of 2016 is $37,172—which is a six percent increase from 2015, according to Student Loan Hero. And $40,000 is a great salary by today’s standards—especially for millennials, whose mean income is just abysmal.

What I’m saying is this:

Using $40,000 in student loan debt and $40,000 in salary is a much more realistic view of what many of you are going through right now.

Back to the budget above, remember we had $267 set aside each month for debt repayment. Now let’s take a look at the loan breakdown on $40,000.

Five-year plan

• Loan balance: $40,000.00
• Interest rate: 3.76 percent
• Loan term: five years
• Monthly loan payment: $732.34
• Number of payments: 60
• Cumulative payments: $43,940.17
• Total interest paid: $3,940.17

In order to pay off $40,000 in student loans over five years, you’d have to drop $732.34 per month—more than double what you have budgeted. This leaves you with a few options:

1. Make more money at your job
2. Pick up a side hustle to increase your income
3. Cut way back on your spending and live super-frugal
4. Take longer to pay off your student loans

I recommend the first three options if you can – because look what happens if you take longer to pay off your loans (let’s say taking 10 years).

10-year plan

• Loan balance: $40,000.00
• Interest rate: 3.76 percent
• Loan term: 10 years
• Monthly loan payment: $400.43
• Number of payments: 120
• Cumulative payments: $48,052.15
• Total interest paid: $8,052.15

Sure, your payment drops to $400.43 per month, but what else do you notice? Instead of paying $3,940 in interest over five years, you’re now paying over $8,000 JUST IN INTEREST.

So it’s possible to do this on $40,000, but you’d have to live well below your means. But what if you wanted to keep your same standard of living and still knock this debt out in five years? What would you have to earn?

Using the standard budget from above, you’d have to make about $110,000 per year in order to keep the same lifestyle and still pay off $40,000 in five years.

Scenario #3—Student loans: $150k / Salary: $192k

For the next scenario, we’re going to look at a physician. On average, a general physician makes around $192,000 per year. Specialists can make much, much more, but for the sake of the example I’m going to stick with a general physician.

Again, using our standardized budget, here’s what a physician’s (making $192,000 per year) spending could look like:

• Housing—$2,560 (16 percent)
• Transportation—$2,240 (14 percent)
• Taxes—$1,920 (12 percent)
• Utilities and other household operational costs—$1,760 (11 percent)
• Food—$1,600 (10 percent)
• Social Security contributions, personal insurance and pensions—$1,440 (9 percent)
• Debt payments or savings—$1,280 (8 percent)
• Healthcare—$960 (6 percent)
• Entertainment—$640 (4 percent)
• Cash contributions—$480 (3 percent)
• Apparel and services—$480 (3 percent)
• Education—$320 (2 percent)
• Vices—$160 (1 percent)
• Miscellaneous—$160 (1 percent)
• Personal care—$160 (1 percent)

For the physician’s loan I’m going to use 5.31 percent—as that’s the average rate for Graduate and Professional degrees. Let’s see if they can afford to pay it off in five years. Here’s the output from our trusty calculator.

Five-year plan

• Loan balance: $150,000.00
• Interest rate: 5.31 percent
• Loan term: five years
• Monthly loan payment: $2,852.04
• Number of payments: 60
• Cumulative payments: $171,122.27
• Total interest paid: $21,122.27

Looks like the physician making $192k is nowhere close to being able to make this payment. This again leaves them with a few options. To make up nearly $1,600 in the budget to cover this payment, the physician would have to dramatically cut back on expenses. Here are a few that stand out to me:

• Food—Spending $1,600 per month is absolutely ridiculous. Even if this is someone who’s supporting their entire family, spending that much on food each month is absurd.
• Healthcare—$960 isn’t unreasonable if you factor in health insurance, but I’d be willing to guess the physician could cut this in half and shouldn’t need to spend close to $1,000 every month on healthcare (assuming they’re a young professional).
• Entertainment—$640 a month on entertainment is a bit overkill. Cut back on the movies, music, and dining out.

So while it’s not easy, it’s highly possible that a physician living frugally can pay off $150,000 in just five years.

But $192,000 a year is big money. What if you didn’t want to live frugally?

Let’s say that same doctor decided not to live a frugal lifestyle and instead wanted to spend that new salary on leasing a new car and buying a big home, taking 20 years instead of five to pay off that massive $150,000 debt.

In our first physician example, you can see that over five years, our physician paid about $21,000 in interest. Yikes. Let’s see what kind of interest Dr. Spender is going to pay.

20-year plan

• Loan balance: $150,000.00
• Interest rate: 5.31 percent
• Loan term: 20 years
• Monthly loan payment: $1,015.80
• Number of payments: 240
• Cumulative payments: $243,792.30
• Total interest paid: $93,792.30

So the payment is affordable—$1,015.80 – and under budget for the physician making $192k. But look at the total interest paid—over $93,000 in 20 years…

That’s a difference of over $72,000!

Summary

The lesson here is to live frugally (and find the lowest rate on your student loans). The budget I used was pulled from the Bureau of Labor Statistics, so it’s surprisingly (or sadly) accurate for many American families.

Simple lifestyle adjustments can make a huge difference over time—and save you a lot of money on your debt. The question is, are you willing to make a small sacrifice now for a big payoff later?

Read more:

• Should You Pay Off Your Student Loan Debt Early?
• What’s The Smartest Way To Pay Off Your Student Loans?