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.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
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1 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 3.89% APR (with Auto Pay) to 6.97% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.23% 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 Month/Day/Year, 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 08/21/18. 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@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 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.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
Savings example: average savings calculated based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were disclosed. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
Application detail: 5 minutes indicates typical time it takes to complete application with applicant information readily available. It does not include time taken to provide underwriting decision or funding of the loan.
Instant rates mean a delivery of personalized rates for those individuals who provide sufficient information to return a rate. For instant rates a soft credit pull will be conducted, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
Total savings calculated by aggregating individual average savings across total borrower population from 9/2013 to 12/2017. Individual average savings calculation based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were provided. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate||Visit SoFi|
|2.47% – 6.23%1||Undergrad & Graduate||Visit Earnest|
|2.47% – 8.03%4||Undergrad & Graduate||Visit Lendkey|
|2.95% – 6.37%2||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.72% – 8.32%6||Undergrad & Graduate||Visit Citizens|