Student loans can be burdensome, and the last thing on your mind is how to save while paying off this loan. Student loan hero puts the average debt figure at around $29,800 per graduate – that’s for last year’s class. The real pressure lies in the tough balancing act of paying off the loan and still having some leftover to save.
Most, if not all the time, you don’t have money to save for your dreams, such as a new home’s down payment or even stashing the money in an IRA. While this may seem like an impossible task, there are proven ways you can use to save money, no matter the size of your student loan.
The tips in this article will help you repay the burdensome student loans while also putting you on a path to setting and achieving savings goals.
1. Craft a Budget and Stick to it
Regardless of your financial situation, it’s recommended that you always have a budget. With student loans, private or federal, you have a more compelling reason to heed this advice. Many graduates assume budgets are only for those with jobs, but this is wrong. You should have a budget to allow you to monitor monthly expenses. Your student loan disbursements will act as your income, rather than a paycheck.
To make a solid budget, you’ll have to list all your income sources. Afterward, list your monthly expenses such as health care, credit cards, food, housing, student loan payments, etc. Once you have the total figures from both categories, you’ll know what to do. If the expenses are more than the income, the most obvious measure to take is to cut back on spending. If you have excess funds, you can channel them toward an emergency fund.
2. Start by Eliminating Debts with High-Interest Rates
This is one of the most common methods used by people in debt. In fact, it’s quite useful. When paying off debts, the first factor to consider is the interest rate charged on each loan. Yes, credit cards are notorious for high rates—12.77% on average.
However, it’s student loans that take the pole position when it comes to loans charging single-digit interest rates. You’ll have to bear 4.45% charged on direct subsidized undergraduate loans.
How do you save while doing this, you ask? You see, many people never think of saving when paying off debts. If they do, a considerable percentage of the income will likely go toward offsetting the previous loan like this. It’ll be unwise to save because these savings will end up paying for the high-interest expenses.
Therefore, the wiser move will be to clear the high-interest debts before you can think of saving. However, if you’re still paying off student loans, you can save money because of the low-interest rates.
3. Consider Student Loan Refinancing
Loan refinancing is an excellent method used by many borrowers to offset outstanding debts. According to thebalance.com, loan refinancing means replacing an existing loan obligation with a new one, often with better repayment terms, such as a lower interest rate.
Forbes puts the interest rates at 2.5% to 3% when refinancing through a private lender. One of the ways refinancing will save you money is through a lower interest rate.
Also, because the overall amount you need to pay will go down, you’ll save on monthly payments as well. While this may sound like a good idea, you must have a good credit score to qualify for lower rates in the first place. Often, lenders look to approve people with a score of over 700.
Also, before considering student loan refinancing, it’s essential to know what you’re about to give up in terms of federal loan protections. This includes forbearance, deferment, loan forgiveness, and income-based repayment plans.
You should also keep in mind the transaction fees and other costs associated with refinancing. You’ll need to find out whether the whole process is worth the trouble, so consider your loan amount. A low-interest rate will be suitable for someone with an $80,000 loan balance.
If you’re unsure of whether you’ll save money through refinancing, lenders have programs that can do the math.
4. Consider Restructuring Your Student Loan
Times may get tough, leaving you cash-strapped. If you ever find yourself in this situation, the best move will be to restructure your student loan. This will help you to keep up with the monthly payments and eventually pay off the loan.
If you have a federal loan, there are some options at your disposal. The first one is deferment, and you can apply for this if you encounter a problematic financial period or decide to pursue an advanced degree. If you defer payment, you’ll not pay any interest on Direct Consolidation Loans, also subsidized FFEL, Perkins Loans, and Direct Subsidized Loans. This doesn’t apply to other loans, and it means the interest will continue to pile, and once the deferment period is over, you’ll have to pay up.
The other option is a forbearance that will allow you to stop making monthly payments to your student loan, although temporarily. This is possible if the lender finds your situation acceptable, including changing jobs, medical bills, or other financial difficulties.
If you’re considering a forbearance, contact your service provider. It’s also important to note that you won’t get these options if you have a private loan. You can apply for a mandatory forbearance if:
- You’re in a dental or medical residency
- You teach in a place that would allow you to qualify for loan forgiveness
- You are on active duty or are a member of the National Guard
- You owe per month over 20% of your total gross monthly income
5. Saving is a Great Habit
It’s important to stash away some money every month to cover unforeseen expenses, retirement, and emergencies. Living without some kind of savings is risky, especially when you have debts to pay off. It’s all rosy financially until you lose your job, fall sick, or bump into an unexpected emergency.
Regardless of how tight your budget may be, there’s always some money you can put aside. If you can’t find the money for savings, it’s time you took a hard look at your spending habits. For example, evaluate your bank statement to find out which expenses you can live without.
Student loans can be a heavy burden to bear, especially if you’re just fresh out of college and looking for a job. Balancing life expenses and debts can take a toll on you. Nevertheless, with the tips highlighted in this article, you should be in a better position to save money and, at the same time, pay off your student loans.