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The cost of college continues to rise. The average student loan debt per borrower from the class of 2018 was more than $28,500. Across more than 44 million borrowers, the average monthly student loan payment is just less than $400.
Shortly after graduation or leaving school, you’ll be required to make student loan payments, and in most cases, for a long time. A smart budget based on your income and other expenses will get you started on the right path.
This guide will show you some budgeting tips for student loans and the steps you can take to create your student loan budget.
In this guide:
- You need to have a budget in the first place
- Enroll in a student loan repayment plan
- Work student loan payments into your budget
- Revisit your budget as your finances change
You need to have a budget in the first place
Budgeting is often seen as the necessary but painful task of evaluating your cash flow. Your budget provides an in-depth understanding of your monthly income, and where you can and should spend that income each month.
Evaluating your financial goals and the funds required to meet them along with essential monthly expenses is crucial toward achieving financial success over time.
>> Read more: How to Plan and Execute a Budget in College
Before you can determine how your student loans fit into your budget, you need to have a budget in the first place! Here are the steps you can take to create a budget that is both realistic and manageable over time.
Step 1. Calculate your income
The first step in creating any budget is figuring out how much money is coming in the door. Personal income can come from many places, including a salaried job, a side hustle, or occasional freelance work.
Add up all of your monthly income so you know where to start. Remember to use your after-tax income—the amount on your paycheck after federal and state taxes are withheld—so you have an accurate number off which to base your budget.
Step 2. Tally your expenses—not including student loan payments
Next, focus your attention on your expenses, excluding your student loan payments for now.
Expenses can include myriad categories, from rent or mortgage payments to utilities to dining out and groceries. If you aren’t sure where you spend money, track your spending for a month or two through a mobile app or a spreadsheet.
Your credit card statments are also a good indicator of where your cash is going. And remember: just because you spent a certain amount at the bar last month doesn’t mean that’s how much you should be paying each month. Some expenses are more important than others.
Spending is never exactly the same from month to month, so set up a long-term system to track it. This will give you more insight into how you spend money over time, and it’s an excellent way to save money because it will reveal categories where you might be spending more than you realize.
Step 3: Allocate your money
Next, allocate your income to the most important categories. Your essential spending categories may include items such as:
- Housing payment
- Utilities, such as electricity and cell phone
- Transportation costs such as an auto loan, car insurance, and gas
- Debt obligations, including student loans—we’ll break that down next
- Long-term savings, such as retirement
Once you have allocated income to these categories, use the rest for saving toward other financial objectives, including entertainment or a vacation fund.
Enroll in a student loan repayment plan
After you’ve created a budget to account for income and required expenses, you can start to see how much cash you have to put toward your student loan payments each month. This can help you determine which repayment plan you will use.
Federal student loans come with a variety of repayment plan options, including standard, graduated, and income-driven plans:
- The standard repayment plan extends equal principal and interest payments over 10 years.
- The graduated repayment plan starts with a lower monthly payment amount, then increases every two years.
- Income-driven repayment plans are based on your income each year, and they will fluctuate as your income changes over time.
If it fits within your budget, the standard repayment plan is the most cost-effective and allows you to be debt-free in 10 years.
Repayment options for private student loans are limited.
You will pay principal and interest over five, 10, 15, or 20 years in most cases, without the option for income-driven repayment.
Private student loans may also carry higher interest rates than federal loans, so prioritize their repayment in your budget along with other high-interest debts like credit card debt.
>> Read more: Pros and Cons of Private Student Loans
If your original loan is not affordable, consider your options for refinancing a private student loan. This may provide a longer repayment term and reduced interest rate, which may lower your monthly payment and save you money over time.
Work student loan payments into your budget
After you have set up your budget, you can quickly see how much is available for your student loan obligations.
If you see that you have extra money available each month, evaluate what you want to accomplish. You could allocate extra income toward additional student loan payments to pay of your student loans early, focusing on the highest interest rate loans first.
You can also siphon off some discretionary income for other financial goals, such as purchasing a home or building your emergency fund.
Revisit your budget as your finances change
A budget is not a stagnant financial tool. Instead, it should be fluid, meaning it is flexible and adaptable over time. As your income increases or expenses decrease, reevaluate your budget to determine where to spend your excess cash flow.
This may be an opportunity to put more toward your student loan debt, helping you pay off your loans faster. Doing so would decrease your total cost of repayment because your loans will accrue less interest.
If your income and expenses have changed significantly, this may also influence your credit score. Having a higher credit score may open the door to refinancing for a lower interest rate and shorter repayment terms.
Taking the time and effort to reassess your financial situation based on your income and expenses helps you uncover these opportunities to speed up your student loan repayment.
Author: Melissa Horton