Managing student loan debt might feel like an ongoing burden that affects your financial goals. However, with the right strategies, you may take control of your loan and protect your financial future. Understanding how to manage your finances is important to complete the loan repayments.
Finding some space in your budget for repayments is quite challenging, especially if you need rent, groceries, and other bills. There are no strict rules for the budget amount you should prepare for. However, there are some efforts you can do to avoid debt piling up. Here are several tips to set your repayment plan.
Tips to Budget Your Student Loans
1. Understand your Loans
The first thing you should do is understand your loan. You have to make a spreadsheet listing the loan name, type, payment, due date, total principal balance left, interest rate, and the period or the number of years and months until the payoff date.
On the other hand, if you still need to figure out how to get a loan, you should contact the financial aid lender to ensure you choose the federal loan first. It may be subsidized, so you do not have any accruing interest while you are in school for at least half-time. It is also easier for you to manage repayment.
You can add it all up and attach other important details if any, so you have a clear picture of your total monthly payments and your total outstanding debt. It’s important to know these numbers. To find it, you have to log into your account for your federal student loan provider or lender.
2. Categorize your Income and Expenses
After that, know all your assets thoroughly. You may jot down your monthly after-tax income and the balances, such as emergency funds and all your checking and savings. If you have investments, liquidate. Then, categorize all your expenses into essential and non-essential categories.
The essentials are utilities, groceries, health insurance, childcare, gas, maintenance, car payments, childcare, and others. Non-essential things are anything you can live without. It includes fashion, hanging out, leisure travel, dining out, concerts, sports, movies, and theater tickets.
Estimating the amount you spend in each category might feel hard for you to find. You can go through your previous month’s expenses for a clear image. It helps you to find out where you can erase and save. Therefore, it’s easier for you to reallocate the sum for paying down your debts quickly.
Take note that you should implement the approach without any judgment. Instead of regretting your past spending and dwelling on it, you have to recognize these experiences as valuable lessons. From this situation, you will get valuable insights about your spending habits. It also guides you towards smarter financial decisions and gets you moving forward.
3. Decide your Financial Goals
Budgeting is mostly personal and you’re the only one who can decide if it’s okay for you to use the loan by considering your financial circumstances. It might be different with those who start a new business since there are spending habits for materials and savings targets than others whose goal is to be free from any debt.
Don’t hesitate and be in a hurry because you still have time figuring out your financial purposes. Write down what you need to fulfill the goals and the amount you might need to support your finances in the next 12 months, 5 years or more. It can also be done by looking at your past spending.
While looking at your goals, you should take off your Friday Night habit to avoid any extra payments toward your student loans. If the numbers stay still or don’t add up, you can get a second job to make extra income. Getting a scholarship also helps you to have another income source. However, make sure that the program offers financial aid and that the activity fits your major.
4. Choose a Budgeting Model
After determining the income, outcome, and goals, you should set a realistic budget. Bear in mind that realism plays a huge role. Changing numbers on your spreadsheet to create wider space to pay down loans will not help you when you don’t have money to spend. There is lots of expert advice you can follow.
One of the models you can apply is the 50/30/20 rule that breaks down your income into wants, needs, and debt or savings. Some advisers suggest borrowing to use this model to manage your budget plan. 30% of the income goes to disposable income, and 20% is used for savings and debts. However, you can choose something that works that suits your needs and preferences.
50% is for needs, like healthcare, transportation, and rent. 30% of your income goes on wants, such as streaming services, travel, and fashion. You may use 20% of the income to pay off debt, emergency funds, and savings. You may adjust the budget plan based on your lifestyle. You may want to cut your expenses to 15% and put the difference toward your loans.
Not only the 50/30/20 model, there is also zero-based budgeting where you allocate your income to certain outcomes or savings purposes. Different from traditional budgeting, you should scratch every month, so every dollar is meaningful. It’s suitable for those who are struggling with prioritizing expenses based on needs and wants.
Envelope budgeting is where you use physical envelopes for different spending areas. Put the cash in every envelope or virtual category. So, it goes to expenses like entertainment, dining out, or other entertainment needs. When the envelope is empty, don’t use another envelope until the next period.
Another good model is by paying yourself first budgeting. Prioritize saving, debt, and investment before using the money for other expenses. In this situation, you should eliminate some parts of your income for savings and debt payments as soon as you get it. So, you avoid any non-negotiable expenses.
To know what’s best for you, you may choose a budgeting model that puts you in control of your finances. The model isn’t right to choose when the model brings unnecessary stress. You will also struggle to face a too-strict budget that doesn’t work for your daily spending style.
5. Pay More than the Minimum
Remember that any minimum payment reduces your debt interest. It helps you to achieve student loan payments easier and faster than the standard plan. Even though you only can afford $5 per month, it still gives positive change. Calculator online is available on the internet and it can be used to estimate your savings.
6. Find Assistance Programs
Although you may not find it hard to pay the loans, you should also reach out for repayment assistance if there is any available option for you. Most students access many programs to repay some or all of their loans in a qualifying field. Some of the programs are held by employers in private agencies. Others are state, local, or federal initiatives available to specific industries.
Generally, these programs are typically for teachers and students from health perspectives. However, you still have to do deep research even if you think you’re not qualified. You may also look into Public Service Loan Forgiveness if your work is in an industry field. Other options are available for people who have been making payments regularly on an IDT for a long grade period.
7. Set up your Budget
Not all borrowers have the same situation, so setting up a budget is different for everyone. The best suggestion is to keep below 20% of your discretionary income or 8% of your monthly income to pay off student debt. Discretionary income is the remaining after taxes and other covered necessities. If the payment is difficult to afford, lower it by installing an income-driven repayment plan.
This refinancing is expected to have better rates and terms, so your payment is proportionate to your income. It helps you adjust the payment with the additional benefit of lowering your rate. If you change the federal loans into private ones, you might lose eligibility for federal repayment plans, forgiveness programs, and other perks.
8. Consider Consolidation
Student consolidation is not always the best decision, so you have to do research. Most lenders offer fixed or variable rates. Fixed rates don’t change through the whole life of the loan, whereas variable rates accrue and change from low to high. Choose what’s best for your financial condition before consolidating.
Consolidating loans can eliminate some borrowers from special programs you may be eligible for, such as Public Service Loan Forgiveness. That is why you have to consult your lender and professional first. Moreover, federal debts should never be consolidated by a private lender since you might lose certain benefits.
Loan consolidation is a process of combining multi-federal loans into a single Direct Consolidation Loan. There are some things you have to consider, such as simplified repayment. You can ask your lender to unite the loans into one streamlined process, so it’s easier to stay on top of the repayments. In this condition, make one payment every month instead of multiple.
Consolidation also offers a new repayment term if you want to extend or shorten your payment term. The longer the term, the lower your monthly payments. However, it increases the interest rates over the life of the loan. Besides, shortening the term increases your monthly repayments, but saves more money over interest.
If you use federal loans, consolidation brings numerous benefits, such as forgiveness programs, income-driven payment plans, deferment and forbearance options. It’s crucial to know that the consolidation only applies to the federal government and not the private sector. You may have a lower interest rate, but if you are interested in taking forgiveness or forbearance, consolidation is a good decision.
9. Manage your Debt
There is also a debt repayment approach that focuses on paying off debts with the biggest first. List your debts from the highest rate to the lowest one. It includes credit cards, car loans, student loans, and others. Put all the outstanding debt balances and interest. Then, arrange the debts in descending order according to the rates.
Take a look at any additional funds in your budget that are directed toward debt repayment. Allocate these funds to the debt with the biggest rate on your list or spreadsheet. When the debt with the highest rate is paid off, use the funds to pay the next one. Keep repeating and continue until all your debts are paid off.
This is called the avalanche method which helps you to focus on paying off debts at a high rate first. By this method, you pay the interest less over time. Even though it needs a longer time to pay off debts at a big rate, the method saves more money in the long run. You must stick with the rule to avoid any difficulties in paying off debt.
Another strategy to take control of your debt is by using the snowball method. It focuses on paying off the debts from smallest to largest interest. List all your debts, such as credit cards, student loans, outstanding balances, and minimum monthly payments. Arrange the loans in order according to the outstanding balance.
Find any additional funds to cut back on discretionary expenses or boost your income. Use these extra funds for the smallest debt on the list. When the smallest interest is paid, take the whole amount to pay it off. Use it for the next debt on the list. It creates a snowball effect, where the available cash for every subsequent loan increases.
Like others, you can keep repeating the process for the next stage. Instead of spreading the money across all debts, focus on eliminating the smallest one first. When it’s all gone, roll the payment into the next smallest, and so on. It creates a snowball effect, where the amount you throw at every subsequent loan increases and builds momentum.
Creating a budget plan helps you with long-term repayments, such as student loans. You can take a whole picture of your finances, such as income, outcomes, debts, and investments. So, you can manage the balance well, not only pay off student debt but also reach your financial goals.
