In 2018, nearly 70% of college graduates went out into the real world with a degree in hand and an average of $29,800 in student loan debt. Graduating with debt means worrying about making an average payment of $393 each month. If you graduated with student loan debt, chances are you feel the burden of it every day.
Despite this, paying down student loans fast shouldn’t necessarily be your top financial goal. Although it’s certainly important to make a concerted effort every month to pay above the minimum on your bill, there are other financial goals that should probably take precedence.
Here are some financial goals that may be more important than paying off student loans.
- Save for retirement
- Pay off high-interest debt
- Create an emergency fund
- Establish a budget
- Save for your children’s education
There is always considerable debate over whether you should first pay off debt or save for retirement. However, there’s no reason why you can’t do both.
In the rush to get their student loan balances down to zero, many people hold off on saving for retirement for too long, losing out on hundreds of thousands of dollars in compound interest and principal growth. Just a few years of lost compound interest can make a huge difference in the amount of money you have saved at the end of your career.
If your job offers a 401(k) employer matching program, this is the best place to start. This is money, and if your employer is matching 3% or 5% of your contributions, it makes sense for you to contribute the maximum your company will match regardless of your student loan interest rates.
The next step when deciding whether to invest your money or pay off student loans is to look at your interest rates. Long-term investments in the stock market usually earn annual returns of 6% to 7%. Meanwhile, undergraduate federal student loans typically come with a 4.53% interest rate. In this case, you can typically earn more by investing the extra money than you can save by paying off your student loans early — especially considering that student loan interest is tax-deductible. However, if your student loan interest rate is 6% or higher, you might want to put your extra money toward paying off your debt or consider refinancing to a lower rate.
If you feel intimidated, know that getting started with investing is easier than you think. Investing apps like Acorns, Robinhood and Betterment are valuable for those with student loans because you can invest as little as a few dollars and don’t need any stock market know-how. These online robo-advisors ask questions about your financial life and preferences and then use algorithms to invest your money accordingly.
Even though putting saving for retirement ahead of paying off student loan debt might not be the right choice for everyone, it can feel good knowing that you have saved money for your future.
Most student loans have relatively low interest rates when compared to credit card interest rates. Though the interest rate on private student loans can run as high as 14.24%, credit card interest rates can be much higher, sometimes as steep as 24.99%.
To determine which debts to pay off first, take the time to organize your debt repayment and create a plan. You’ll want to consider two factors when prioritizing debt — interest rate and balance due on each account — so write those down.
There are two main methods to paying off multiple debt balances: the snowball method and the avalanche method. If you need small wins in the beginning to motivate you, the snowball method involves paying off your smallest balances first so you feel hopeful and ready to tackle the big ones. However, sticking to the avalanche method will get your debt paid off more quickly because it involves getting rid of your highest-interest balances first. This will also save you the most money. If you have extremely high-interest debt — for example, $5,000 of credit card debt at a 24% interest rate — consider tackling that balance first.
You may want to consider applying for a personal loan at a lower interest rate so you can consolidate the high-interest credit card debt. You can do this through your local bank or even try peer-to-peer lending sites like Prosper or LendingClub.
The math makes the case for paying off the high-interest debt, and it will be far better for you in the long run if you make that a priority before significantly reducing your student loan balance. Once you’ve gotten your interest rate down or paid off high-interest balances, you can consider switching to the snowball method to pay off remaining balances that have similar interest rates.
Having access to liquidity — that is, cash — is valuable in itself. It’s great to be able to make large payments toward your student loans, but won’t help if you get into a car accident and have to go to the hospital and don’t have the money to pay for it. Unfortunately, the unexpected does happen sometimes.
If you don’t have an emergency fund in this case, you could be forced to miss student loan payments altogether, which can damage your credit report and your future. Instead, create an emergency fund before you start making extra payments on your student loans.
Start with at least $500 if you’re tackling high-interest debt like credit cards. If you’re just up against low- to moderate-rate student loans, aim for six months’ worth of basic living expenses. That way, if something bad happens, you have the money to handle it and can keep paying your loans uninterrupted.
When you make a payment toward your student loans, you can’t get it back. Even if you are excited that you made a $1,000 dent in your loans, it won’t be worth it if you need the money just a few days later. This is where establishing a budget comes in.
Paying down your student loan requires discipline, not only to make your payments on time, but to incorporate your payments into your overall financial plan for your day-to-day life. A monthly budget, where you list out all of your bills and expenses and compare them to your monthly income, will allow you to see just how much you can put towards your loans. It might also show you areas where you can cut back so you can boost your student loan monthly payment.
However, this may not be possible without setting up your budget before you aggressively pay down your student loan debt. Once you know your financial tendencies and personality, you’ll be far better off in your debt repayment journey.
As your children grow up, you might want to shift your priorities from quickly paying off your student loans to saving for their college education. This is understandable — you’ve experienced the burden of student loans firsthand and don’t want your kids to go through the same experience.
There’s no reason why you can’t multitask and save for your child’s future while you continue to work toward becoming debt-free yourself, especially considering you can invest your child’s college savings and potentially reserve returns greater than what you’re paying in student loan interest.
The key is to start early. Doing so will allow you to save in small increments while taking advantage of long-term investment returns. You can also consider a college savings plan, like a 529 plan, which allows you to invest your money now and withdraw it tax-free when it’s time to pay for your kid’s education.
The choice is up to you, but even if you don’t want to prioritize saving for your children’s college over paying off your student loans, at least consider it in the future.
In the rush to get your student loan balance to $0, it’s important to avoid neglecting the rest of your financial life. Paying off your student loans should be a priority, but it shouldn’t be your only one. There are benefits to building an emergency fund and a budget, as well as starting to save for retirement, to make sure you have a bright financial future.
Elizabeth Aldrich contributed to this report.
Interested in refinancing student loans?Here are the top 6 lenders of 2020!
|Lender||Variable APR||Eligible Degrees|
|1.99% – 6.65%1||Undergrad & Graduate|
|1.99% – 7.10%2||Undergrad & Graduate|
|2.99% – 6.44%3||Undergrad & Graduate|
|2.39% – 6.01%||Undergrad |
|1.99% – 6.43%4||Undergrad & Graduate|
|3.18% – 6.07%5||Undergrad & Graduate|
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1 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of June 23, 2020. Information and rates are subject to change without notice.
2 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Splash Financial loans are available through arrangements with lending partners. Your loan application will be submitted to the lending partner and be evaluated at their sole discretion. For loans where a credit union is the lender, or a purchaser of the loan, in order to refinance your loans, you will need to become a credit union member.
The Splash Student Loan Refinance Program is not offered or endorsed by any college or university. Neither Splash Financial nor the lending partner are affiliated with or endorse any college or university listed on this website.
You should review the benefits of your federal student loan; it may offer specific benefits that a private refinance/consolidation loan may not offer. If you work in the public sector, are in the military or taking advantage of a federal department of relief program, such as income based repayment or public service forgiveness, you may not want to refinance, as these benefits do not transfer to private refinance/consolidation loans.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of May 1, 2020.
Fixed APR: Annual Percentage Rate [APR] is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rate options range from 2.88% (without autopay) to 7.27% (without autopay) and will vary based on application terms, level of degree and presence of a co-signer. Rates are subject to change without notice. Fixed rate options without an autopay discount consist of a range from 2.88% per year to 6.21% per year for a 5-year term, 3.40% per year to 6.25% per year for a 7-year term, 3.45% to 5.08% for a 8-year term, 3.89% per year to 6.65% per year for a 10-year term, 4.18% per year to 5.11% per year for a 12-year term, 4.20% per year to 7.05% per year for a 15-year term, or 4.51% per year to 7.27% per year for a 20-year term, with no origination fees. The fixed interest rate will apply until the loan is paid in full (whether before or after default, and whether before or after the scheduled maturity date of the loan).
Variable APR: Annual Percentage Rate [APR] is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Variable rate options range from 1.99% (with autopay) to 7.10% (without autopay) and will vary based on application terms, level of degree and presence of a co-signer. Our lowest rate option is shown with a 0.25% autopay discount. Our highest rate option does not include an autopay discount. The variable rates are based on the Variable rate index, is based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of April 27, 2020, the one-month LIBOR rate is 0.43763%. The interest rate on a variable rate loan is comprised of an index and margin added together. The margin is a fixed amount (disclosed at the time of your loan application) added each month to the index to determine the next month’s variable rate. Variable rate options without an autopay discount consist of a range from 2.01% per year to 6.30% per year for a 5-year term, 4.00% per year to 6.35% per year for a 7-year term, 2.09% per year to 3.92% per year for a 8-year term, 4.25% per year to 6.40% per year for a 10-year term, 2.67% per year to 4.56% per year for a 12-year term, 3.44% per year to 6.65% per year for a 15-year term, 4.75% per year to 6.93% per year for a 20-year term, or 5.14% per year to 7.10% for a 25-year term, with no origination fees. APR is subject to increase after consummation. Variable interest rates will fluctuate over the term of the borrower’s loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a co-signer. The maximum variable rate may be between 9.00% and 16.00%, depending on loan term. The floor rate may be between 0.54% and 4.21%, depending on loan term. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
3 Important Disclosures for SoFi.
4 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.19% APR (with Auto Pay) to 6.43% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 6.43% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of June 15, 2020, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 6/15/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.19% effective June 10, 2020.