When you graduate from college and get your first “professional” job, it’s an exciting time. You are most likely making more money than you did before, and you are hopefully working in a field where your degree comes in handy.
Of course, life after graduation isn’t all sunshine and rainbows. You also have to start thinking about student loan repayment. If you have federal student loans, for example, you’ll need to start paying the minimum payment six months after you graduate. If you have private loans, you may already be paying yours back.
But now that you have a higher professional salary, how should you approach your student loans? Should you pay them off faster… or should you stick to the payment terms of your loan?
The answers lie in the type of loan you have — and how much money you can commit to paying them down.
Pay Off Your Student Loans With a Budget
After you understand your loan and its terms, you’ll have a better idea of how soon you need to start paying them down. From there, your next step is budgeting. (If you’re resistant to the idea of budgeting, it might help to call this “cash flow”!)
Budgeting is the cornerstone of financial stability and effective debt management. By creating a budget, you gain insight into your income, expenses, and spending habits. This allows you to make informed decisions about your finances and give yourself permission to spend the money appropriately. Budgets also give each dollar a specific purpose.
Ready to evaluate how much you should pay toward your student loans each month? Here’s how to get started:
Track Your Income and Expenses
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- List all sources of income, including wages, freelance earnings, and any other sources of revenue.
- Record your monthly expenses, including necessities such as rent, utilities, groceries, and transportation, as well as discretionary spending such as entertainment and dining out.
- Make sure you budget for debt repayment, like your student loans — but don’t forget car payments, credit cards, etc.
- Calculate savings for your emergency fund, retirement, or specific goals you wish to achieve, such as buying a house or going on vacation.
NEED A BUDGET TEMPLATE TO HELP YOU GET STARTED?
Differentiate Between Needs and Wants
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- Distinguish between essential expenses (needs) and non-essential expenses (wants). Everyone’s needs and wants will differ, depending on what they value and prioritize.
- Deciding on your needs and wants will help you identify areas where you can cut back to free up funds should you find yourself in a situation where you may have more money going out than coming in.
- Examples of needs: housing, food, utilities, transportation, etc.
- Examples of wants: leisure travel and vacations, concerts, eating out, etc.
Note: ”Needs” will sometimes seep into “wants.” For example, yes, you need a place to live. Yes, you need to live in as safe of an area as possible. But no, you don’t need to live in the most expensive house or apartment in the best area in town. Find a balance that fits your budget and be very critical if it’s a need or a want disguised as a need.
Set Realistic Goals
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- Establish short-term and long-term financial goals, such as buying a house, paying off your student loans, retirement, etc.
- Clearly outline how much those goals will “cost” you, and make sure that you break down goals monthly so you can set aside enough to reach them.
- Ensure your goals are achievable within your current financial situation. As financial planners, we often see individuals set unrealistic goals.
- For example, let’s say you want to pay off your credit card debt in 5 months and you owe $10,000. You can currently only pay $50 per month towards it, though, which means this goal is not a mathematical possibility!
- Make sure you differentiate between goals and dreams. For example, you can say that your goal is to retire tomorrow, but if you haven’t saved up for retirement and don’t have sufficient income, that’s not a goal; that’s a dream.
- A goal, instead would be saying that you want to retire in 20 years. Let’s say you need $500,000 when you retire and have $100,000 saved.
- Your steps: Go online and find a calculator that will give you a rough estimate of how much money you’ll need to save each month to hit that target.
Adjust Your Budget As Needed
Your budget isn’t set in stone; it’s a flexible tool that can and should be adjusted as your financial situation changes. Periodically review your budget and make adjustments as needed to stay on track with your financial goals.
Creating a financial roadmap through budgeting allows you to take control of your finances and prioritize loan repayment. By allocating funds strategically and making student loan payments a priority, you can make significant progress toward achieving your debt-free goals.
Next Step: Setting Yourself Up for Loan Repayment Success
Once you’ve created a budget, it’s time to decide how much of your income and other funds you want to funnel toward loan repayment. Here are some things to consider as you add in student loans to your budget:
Make Student Loan Payments a Priority
Treat your student loan payments as non-negotiable expenses, just like rent or utilities. Prioritize making your monthly payments on time to avoid late fees and negative consequences on your credit score.
Identify Cost-Cutting Opportunities
Review your budget to identify areas where you can reduce expenses. This might involve cutting back on discretionary spending, finding cheaper alternatives for necessities, or eliminating unnecessary subscriptions or memberships.
Automate Your Payments
Set up automatic payments for your student loans to ensure you never miss a due date. Many lenders offer discounts or incentives for enrolling in autopay, making it a win-win for borrowers.
If you’re wondering, “How much should I pay toward my loans?” keep reading. We have some really great tips that have helped many of our clients approach their loan repayment with more clarity and confidence.
Choose Your Debt Repayment “Style”
So you’ve set your budget, you tentatively know how much you have to commit to paying down your loans… and now it’s on autopay. Great! However, what if you want to pay off your loans faster? What if you’re realizing that you don’t want to have that debt for the next 10, 15, or even 30 years?
This is where choosing a debt repayment “strategy” can help. We frequently use two strategies: The Snowball and Avalanche methods, or as we like to call them, emotion-based and math-based methods.
Snowball Method
This is a more emotion-based debt repayment approach, where you select the lowest balance to pay off first without focusing on the interest rate. You rank your debt from lowest to highest balance and still pay the required minimum amount on all your debt — except you throw every additional cent you have toward that lowest balance item. This allows you to pay it off quickly because every cent adds up like a snowball rolling down a hill! Once it’s paid off, you move onto the second lowest balance, add what you’ve been paying to the first one to the second’s minimum payment amount, and work down the line until it’s all paid off.
We call it an emotional-based method because it provides a psychological boost and motivation as you quickly eliminate smaller debts. Each one gives you more confidence to keep going and feel like you are actually achieving your goals.
Example:
Say you owe $1,000, $5,000, and $10,000 on three different student loans. Your minimum payment on all of them is $10. After your budgeting calculations (which you did above), you know you have $520 per month you could contribute towards debt repayment.
Your $5,000 and $10,000 debt will be paid $10 each, and the remaining $500 will go towards paying off the $1,000 loan. After 2 months, your first loan will be paid off completely. Give yourself a high-five and now roll that $500 into the second smallest balance — in this instance, the $5,000 one. In month 3, you’ll pay $510 towards the $5,000 loan and $10 towards the $10,000. Keep going until you roll that $510 balance into the $10,000 loan.
Avalanche Method
This is what we call a math-based method in which you focus on paying off the loans with the highest interest rates — without paying attention to the balance of each loan. Rank all your debt from the highest to lowest interest rate and focus on aggressively paying off the highest interest rate balance on your list. When done, roll that payment onto the next highest one until they’re all paid off.
The benefit of this debt repayment approach is that you save money overall because you are eliminating the most expensive loans and avoiding accumulating interest as you work to pay down other balances.
Example:
Let’s assume you have $520 you can contribute towards your debt repayment and all of your loans have a $10 per month minimum payment, just like in the example above. However, now you look at those three loans’ interest rates: 23%, 18%, and 7%. In this instance, you’ll pay $10 toward the 18% and the 7% loans and pay $500 toward the 23% one. Once that one is paid off, give yourself a high-five and tackle your 18% loan by paying $510 towards it while paying $10 towards the 7% interest. Continue until everything is paid off!
Which one to choose?
Which method (snowball or avalanche) you choose is really up to you. If you get excited by checking things off as fast as possible, and that keeps you going, then the emotion-based or Snowball method will work the best for you. If you are motivated by knowing you are saving money over the long term, go for the math-based or Avalanche method. If you, by chance, have two loans with the same interest rate or the same balance owed, you can combine the methods to help you prioritize them. Whichever one you choose, stick with it. Constantly going back and forth will only prolong the issue and frustrate you in the process!
Should You Pay Off Your Student Loans Faster?
One of the most common questions we get is, “Should I pay off my student loans faster?” While most federal student loans have 10 to 25-year repayment terms with many repayment options, you may have private loans with longer or shorter repayment schedules. Interest rates also vary depending on the type of loan you have, and the longer you have a loan, the more interest you accumulate.
It’s not uncommon for borrowers to feel frustrated when they pay toward their loans but see that their total loan amount due hasn’t changed — or even potentially gone up. That’s because of interest!
This is why we want you to evaluate your budget, understand the types of loans you have, and consider your repayment style. We don’t want you to spend more money than you absolutely have to, but we want you to create a realistic student loan repayment approach!
Of course, it helps to see the numbers in no uncertain terms to help you decide how much you should pay toward your student loan debt. To help you, we’ve created A Step-by-Step Guide to Paying Off Your Student Loans.
This resource offers clear information on:
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- The pros and cons of paying off your student loans early vs. making lower payments over a longer period of time.
- Calculations to show how much money you could save on interest if you pay off your student loans early — and see how an aggressive repayment schedule could impact your overall budget.
- Steps to help you ensure you can afford higher payments without sacrificing your financial stability.
Grab the guide and calculator for FREE below!