How to Tell If You Spend Too Much on Loans, Plus 5 Ways to Save

are-you-paying-too-much-for-your-student-loans

It takes a lot of planning, intuition, and foresight to determine how much you should be putting towards your student loan debt.

After all, it all comes down to your personal situation: how much you’ve borrowed, what your degree is in, and what kind of salary prospects await you in the years following graduation.

But just how much is too much to pay towards your student loans each month, and what happens when it becomes evident that you’re overpaying?

How much is too much for student loan payments?

Ask yourself if you’ve been able to comfortably pay off your loans. Have you had too many months in a row where you’ve struggled to make your payments and fit in other expenses with ease? Are your payments skewing your budget?

Say you’ve got a standard subsidized loan for $30,000 with a 6% interest rate, and a 10-year/120-month amortization period. Based on this information, you’ll be paying about $333 per month on a standard plan, or about $190 on a graduated repayment schedule. Increase your loan amount to $50,000 borrowed with the same 6% APR, and you’ll owe about $555 monthly on a standard repayment plan, or $317 graduated.

Now, if you’re a recent college graduate with an entry-level salary — $35,000 to $40,000, for example — it’s already clear that you might be spreading yourself way too thin to make those payments in full and on time, especially when you’ve got other monthly expenses to go around. Sure, you might get a pay increase in time, but will it be enough to make a difference in your debt burden?

Many financial experts tout the 50/30/20 rule when it comes to budgeting, where one allots 50% of their monthly take-home pay to these fixed expenses, 30% on non-necessities like shopping and hobbies, and 20% on goals like saving for retirement or building an emergency fund.

On an entry-level salary, assume you’ve got $2,000 in monthly net income. Half of that — $1,000 — should be devoted to expenses like your rent or mortgage, car payment, utilities, and other regular bills.

Estimate your rent at $800/month, a $150 auto loan payment, and $50 in gas/electric bills, and that’s your whole allotment right there. Not a whole lot of wiggle room for fitting in a student loan payment … at least not without dipping into the rest of your income, leaving little left over for saving or any discretionary spending.

You might not have a car payment, for one, but replace that expense with a student loan payment, and you’ve got nothing left over to save for a car should you need one in the future. And unless you want to spend 75% or more of your income on bills, that’s not a very financially savvy way to live.

Evaluate your budget and crunch some numbers. If it’s clear that your student loans aren’t a seamless fit, consider some alternatives to lessen your debt burden if you feel you’re paying too much.

Lower your student loan costs

1. Refinance your loans

Refinancing the terms of your loan can help reduce your payment with a new, lower interest rate and reconfigured terms. Imagine if you could drop your APR a point or two, and extend the repayment terms on your loan — both can make a significant difference in how much you’ll owe each month to your lender. If you’ve got several loans, consolidating them into one brand new loan with better terms can also help fit your payments into your budget.

Use the calculator below to see if refinancing could save you money.

Student Loan Refinancing Calculator

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2. Get on an income-based repayment plan

An income-driven plan limits the amount of income paid towards your federal loans every month. Under income-based repayment, or IBR, payments require no more than 10 to 15% of your income over a 25-year repayment period. Pay-as-you-earn is another option, typically a 20-year plan and 10% of your income. An income-contingent plan is also a variation of IBR; here, you’ll owe no more than 20% of your income over 25 years.

3. Apply for a deferment or forbearance

If your payments are simply too much to handle, a deferment, like its name says, temporarily defers your loan principal and interest to a later date until you get your finances back on track. A forbearance is similar, only you’ll continue to accrue and owe interest even if your payments are halted.

4. Adjust your budget

Maybe it’s not your student loan payments that are too high, but your budget that’s out of whack. Start delving into your budget: Is there anywhere you can make tweaks, cuts, or adjustments to better fit your student loan payments into the mix?

Try moving to a cheaper apartment or finding roommates to free up some money. Limit how often you eat at restaurants. Can you give up some luxuries, like a cable subscription or gym membership, for the time being? Are there ways to make extra cash on the side?

Take a good look at your income and expenses — money coming in and going out — and be realistic about what your wants and needs are. Finding this proverbial “wiggle room” in your budget can make even a small difference in managing your loan debt.

Learn more about budgeting here.

5. Seek student loan counseling

If it all seems too much to tackle on your own, consider consulting a student loan counselor to help organize and map out a plan to reduce your student loan debt load. The right counseling service can help you build a budget, identify your financial goals, and organize your loans so they become manageable without having to skimp on your payments or other expenses. A certified, legitimate counselor can also aid you in communicating with your lender when pursuing some of these alternatives.

Ultimately, there’s no one way to go about it. Take some of these suggestions and come up with some creative ways of your own to free up your budget and pay off your loans with less difficulty. Remember that there is a light at the end of the tunnel. Your student loans won’t last forever, and with the right steps in place, may not be a part of your financial life longer than they need to be.

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