Every month, you dutifully make your student loan payment. You know that you could be paying more than the minimum, but is that a smart thing to do?
How much should you put toward your student loan payment, anyway? It’s a question facing many of today’s borrowers.
Unfortunately, as with most things in life, there is no one-size-fits-all answer. What is right for you could be disastrous for me.
Why? Because it’s all about context and your personal situation.
For example, I don’t have any kids, a house, or a car. My financial situation and repayment strategy is necessarily different from someone with kids and a mortgage.
Though there isn’t any perfect answer, there are ways to figure out how much you should put toward your student loan repayment. Here are three steps to determining how much to pay with some help from financial experts.
1. Start with Your Interest Rate
When figuring out how much you should put toward paying back your student loans, start by examining your interest rate. Your interest rate matters because it can help you to decide whether you should pay down debt or save and invest.
If you have a low interest rate, as I do on my undergraduate loan (2.3%), then it makes sense to spend your money at high-interest debt, such as credit card debt and Graduate PLUS loans. Borrowers can also consider refinancing their loans to find out whether they qualify for better rates.
“If refinancing to a good rate is not possible, we recommend clients put all their energy into knocking it out ASAP,” says Daniel Wrenne, a Certified Financial Planner at Wrenne Financial Planning.
“The exception to both these options is if they are going for Public Service Loan Forgiveness. If that’s the case, we recommend paying minimum payments necessary to qualify (and of course investing, saving or paying down other debt with the remainder),” Wrenne adds.
Yet, what if you have a low interest rate on your student loans? In such a case, Wrenne recommends making minimum payments until you have established an emergency fund. At that point, borrowers should focus on paying off high-interest credit card debt and saving for long-term goals, such as retirement.
Once those financial goals are met, Wrenne encourages borrowers to devote the rest of their time and resources toward paying back student loans.
PJ Wallin, Founder and Lead Advisor at Atlas Financial, suggests another plan for borrowers facing low-interest rates: “If someone doesn’t mind having the debt and has low rates, a 10 year fixed payoff [on the Standard Repayment Plan], with a good 6–12 months of reserve payments in the emergency account is sufficient.”
2. Assess the Rest of Your Situation
Everyone’s situation is different, so it’s crucial that you assess your unique situation to determine how much you should put toward your student loan repayment. Consider the following:
- Do others (e.g., a spouse, children) depend on you financially?
- How much are your basic bills? That is, what is your bare-bones budget?
- How much do you have in savings?
- Do you have credit card debt in addition to student loan debt?
- Do you have health insurance, rental, or any other types of insurance?
- Do you live in an area with a high cost of living?
- Is your employment situation stable—that is, as stable as any job can be?
- Do you have other debt, such as an auto loan or outstanding medical bills?
All of the above affect how much you should put toward debt and how much you should save.
Dave Ramsey, who has helped many people climb out of debt, recommends using his Baby Steps method to save, pay off debt, and build wealth. He recommends starting out with $1,000 in an emergency fund and focusing exclusively on paying off debt by using the snowball method.
Though the advice is nice, it doesn’t take into account the uniqueness of each person’s situation. As a freelancer, I don’t feel comfortable with having only $1,000 in savings. Yet, if you have a secure full-time job that pays well, then perhaps Ramsey’s approach would make more sense.
In any case, it’s important to have some sort of emergency savings because emergencies are inevitable: car accidents, the death of loved ones, and sudden illness, among a host of others. But there are other things that you may want to save up for as well, such as retirement or travel.
The key to saving is to balance meeting your financial needs so that you are prepared for an emergency, to avoid setting yourself up for more debt, and to make moves toward reaching your financial goals.
If you are singularly focused on paying off debt as soon as possible, then be sure that you are prepared for what life will throw at you, as well as that you aren’t leaving money on the table.
Wallin adds, “If the goal is to pay [your loans] down quickly, one doesn’t want to lose sight of the need for an emergency fund and to not give up any freebies like 401k match.”
3. Do a Gut Check
Since personal finance is inherently personal, it’s important that you do a gut check: how do your student loans make you feel?
Why is doing a gut check so important? Because you won’t make any progress toward meeting any of your financial goals without motivation. You need to know what will inspire you at the end of the day.
For instance, do your student loans make you physically ill? Do you have trouble sleeping at night because of them? Are they a constant source of stress for you? In each case, I’ve been there. I’ve learned that one surefire way to cope is to use those emotions to fuel your debt repayment.
Yet, if you’re locked into a good plan with a nice interest rate and don’t mind your repayment term, then why not focus on building wealth through saving and investing?
“I am a big proponent of paying down student loan debt while building up your assets at the same time,” says Shannon L. McLay, Founder of Next-Gen Financial. “This has the same impact on your net worth compared to just paying down debt; however, you enjoy not only the financial benefit of cash to protect you from getting into further debt but also the psychological benefit of watching your bank account grow.”
The key is to try to find a balance between paying off debt, saving for short-term and long-term goals, and investing. It’s a delicate balance and one that is invariably personal. Everyone will form a different plan.
So, if you’re wondering how much you should put toward your student loan payment, then use these tips to devise a plan that works for you. Just be sure that you have cash saved up for emergencies. To play it safe, you could save 10% of your income, invest another 10% in a 401k with a match, and put the rest toward debt repayment.
Whatever you decide to do, make sure that your plan suits your goals and upholds your values. Make sure you feel comfortable with your plan and realize that it may change over time as your life and goals change as well.
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