$351 — that’s the average student loan payment for borrowers in their 20’s and 30’s. With such a high bill, student loans can prevent you from pursuing other goals, like getting married or starting a business. In fact, the Federal Reserve Bank even found that student loan borrowers are far less likely to become homeowners.
While student loans are certainly a heavy burden, they don’t have to ruin your plans. Below, learn how to balance student loan repayment with your other life goals.
How to decide which goal to prioritize
There isn’t just one way to manage your loans; everyone has different priorities when it comes to their finances. For some, student loan repayment may be their number one priority, and that may make the most sense. For others, student loans aren’t a big deal, and their money would be better spent saving for a downpayment on a house.
It’s a very personal decision, but there are several factors you should keep in mind when considering how to repay your loans.
1. Evaluate your situation
Before putting all your extra money toward your student loans, look at your total financial picture. There are some other financial goals that should take priority over debt repayment.
For example, if you don’t have any money tucked away in an emergency fund, you could be taking a big risk. One unexpected car repair or medical bill could lead you further into debt. If that’s the case for you, it’s a good idea to sock away at least $1,000 for emergencies before paying down your debt so you have some protection.
Similarly, it’s important to start saving for retirement while you’re young so your money has time to grow. If your company offers incentives, like a 401(k) match, contribute enough to qualify for the maximum match. Otherwise, you’re leaving free money on the table. If you still have money left over, then you can focus on repaying your loans.
2. Think about your goals
Next, think about your financial goals. For some people, debt is a heavy weight on their shoulders that prevents them from sleeping at night. For others, priorities like buying a home may be more important. Think about what your goals are, and allocate money based on what you want most.
3. Review your interest rates
Your interest rates should inform your decisions, too. If you have a high interest rate on your loans — such as 5% or higher — you could end up paying far more than you originally borrowed. If that’s the case, prioritizing your student loan repayment could help you save more money over time.
If you have private student loans, chances are your interest rates are higher than 5%. However, federal loans aren’t exempt from high interest rates, either. As of the 2018-2019 school year, Direct Unsubsidized Loans for graduates and Direct PLUS Loans have interest rates of 6.6% and 7.6%, respectively. With such a high rate, your balance can quickly balloon out of control.
But if your loans have a low interest rate — such as older federal loans — it may make sense to invest your money, instead. You’ll earn a higher rate of return and stretch your dollars further.
4. Apply for another payment plan
If you have federal student loans and you’re struggling to afford your payments or want to free up more money each month for your other goals, consider applying for another payment plan. Many federal loans are eligible for income-driven repayment (IDR) plans, in which your monthly payments are based on a percentage of your discretionary income. You could qualify for a dramatically lower monthly payment, giving you more breathing room in your budget. However, keep in mind that by lowering your payment, you will likely be increasing the amount you pay over the life of the loan. If you can afford to, paying off your loans sooner is the best way to save money.
5. Consider student loan refinancing
If you have high-interest loans or need a lower payment and don’t qualify for an IDR plan, another option that can help you reach your goals is student loan refinancing. With this option, you take out a loan from a private loan and use it to pay off your old debt. The new loan has different repayment terms, including interest rate, length of repayment, and monthly payment. Refinancing can help you save money, lower your monthly payment, and get out of debt faster.
Use Purefy’s Find My Rate tool to compare offers from student loan refinancing companies.
How to pay off student loans ahead of schedule
If you decide that student loan repayment is your focus, there are a number of ways to pay off your debt early:
- Skip the grace period: Most lenders give you a grace period after you graduate, when you don’t have to make payments on your loans. If you skip the grace period and start making payments right away, then you can cut down on the amount of interest you owe.
- Pay more than the minimum: If you pay the minimum on your loans, it will likely take you 10 years or more to pay them off. Pay a little more each month — even if it’s just an extra $20 — to cut down on the interest you’ll pay over the length of your loan.
- Pick up a side hustle: If you’re determined to pay off your debt as soon as possible, consider picking up a side hustle so you can make extra money during your free time. If you apply your earnings to your debt, you can cut your repayment period down.
- Refinance your loans: If you want to pay off your debt aggressively, refinancing can help you save money and pay off your loans much sooner. By refinancing your loans through Purefy, you could save thousands of dollars.
Student loans can seriously affect your future, limiting your ability to chase your dreams. But while student loans are often a problem, they don’t have to dominate your life. By reviewing your priorities and making strategic decisions with your money, you can pursue your goals while managing your debt.