Student loan payments are a major financial burden for many.
In fact, recent student loan debt statistics show that loan payments account for about 6% of the average American's monthly expenses. With the majority of Americans paying between $100 and $400 monthly, these loans represent a good portion of annual spending.
The big question is, if you're devoting so much of your money toward paying back your educational loan, what should you do with the rest of your cash?
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Using your money wisely is crucial when you have student debt to pay
With your student loan payments taking up a good portion of the money you bring home each month, it becomes more important than ever to prioritize your financial goals and to make smart spending and saving choices.
In general, there are a few good rules of thumb that you should follow when you decide what to do with the rest of your money. Specifically:
- You should try to keep total housing costs to 25% of your income or less.
- You should aim to save 20% of your money.
- You should try to keep fixed costs below 50% of your income (including student loan payments).
- Discretionary spending should account for about 30% of your money.
Of course, this is easier said than done if you're trying to afford housing and student loan payments and other essentials like groceries within that 50% of your funds you're devoting to essential expenses. And it will likely require living on a budget and perhaps living a little more frugally than you like -- perhaps by having a roommate for a while or driving a cheaper used car instead of buying a new one.
While it does require some extra effort to live within your means when paying back student loan payments -- especially if you're also trying to hit that 20% savings target -- it's worth the effort.
Student loans can take a decade to pay off under a standard repayment plan or longer if you have private student loans with a long payoff term or federal loans being repaid on a plan with a 25- or 30-year payoff timeline. You can't afford to wait until these loans are paid in full before you start doing other things like saving for retirement or a home down payment.
Should you pay extra on your student loans?
As you're making your budget, you'll have a choice to make about what to do with the rest of your funds after making your student loan payments. One option is to try to repay what you owe ahead of schedule so you can free up that 6% of your income for other things.
While it may be tempting to pay off student loans ASAP, ask yourself what the opportunity cost is. Your student loan interest is probably tax-deductible, and the rate you are paying on these loans may be below the rate on other debt you'd take on (such as credit card debt). Chances are good that you could also earn a better return by investing in the stock market than by repaying your loans early (as your ROI on early payoff is just the interest saved).
Federal student loans also come with unique borrower benefits that you won't find with other kinds of debt, like the ability to cap payments at a set percent of your income or even pause payments altogether if you decide to go back to school or face financial hardship. Getting rid of this debt perhaps shouldn't be your top priority if you have other things to do with your money.
Ultimately, you know what goals are most important to you. But, you may find that becoming free of your student debt early isn't as wise of a way to use your extra funds as investing for your future is. If so, keep paying the minimums on your student loan payoff plan and use the rest of your cash to accomplish those other financial objectives that matter to you.
