7 Steps To Fit Student Loans Into Your Financial Life Plan

March 18, 2019

What started out as whispers of a potential financial crisis related to recent student loan borrowing has grown to a cacophony of fear, frustration, and concern. The staggering amount of student loan debt in our country has been a shocking wake-up call. As a result, many recent graduates are in need of guidance.

While high student loan balances are having a significant impact on people of all ages, they are particularly stressful for younger employees or those who went back to school during the “Great Recession.” We often hear the anxiety in employees’ voices about having student loans and wanting to pay them off sooner versus later.

But as my colleague Kelley Long notes, there are situations where student loan debt isn’t as bad as it seems. In a Forbes contribution she highlighted the importance of prioritizing other personal financial goals before worrying about making extra payments on student loans. Here are a few financial wellness steps that generally should be taken before making any extra payments on student loans:

Step 1: Make a list of your most important goals.

Student loan debt may seem like a significant burden, but it doesn’t have to be the fun killer that prevents you from reaching meaningful life goals. No matter how tight your budget is, it is important to have a written financial plan to provide guidance when prioritizing where to allocate your time and financial resources.

In fact, the simple act of putting your specific goals in writing and the steps needed to accomplish them actually increases the likelihood you will achieve those goals. Your financial plan doesn’t have to be anything too elaborate. As Carl Richards points out in his book appropriately named The One-Page Financial Plan: A Simple Way to Be Smart About Your Money, you can accomplish big things with a basic plan.

Many people assume that just because they have student loans, they will never be able to buy a home or retire. A simple one-page financial action plan that helps you set SMART goals could be the solution to help you feel like you are making as much progress as possible as you fit student loan payments into other areas of your financial life.

Step 2:  Create (and follow) a personal spending plan.

This one sounds like a no-brainer yet only one out of three Americans actually follows a budget and tracks income and expenses on a regular basis. Depending on which repayment plan you have, student loan payments are typically 10 to 15 percent of discretionary income.

Over 40 percent of student loan borrowers are not currently making any payments. If your loans are currently in deferment status, try to go ahead and incorporate your future payments into the spending plan. Instead of paying your loan servicer, you can start saving some of those payments and get into the habit of making the payment to yourself.

For those who are making payments, the average monthly payment is $351 for borrowers between the ages of 20 and 30. Choosing the right repayment plan is about more than just minimizing your current payments. Knowing how long it will take to become debt-free and how much you will pay in total interest over the life of your loan are major factors to consider. To learn more about choosing the right repayment plan for federal student loans visit Studentaid.ed.gov.

Step 3: Establish a starter emergency fund.

This is the “baby steps” stage that sets the framework for creating a fully funded safety net account. The starter safety net fund typically ranges from $1k-$2k in an account separate from your regular checking account and will come in handy if any unexpected medical, auto, or home expenses occur.

Step 4: Contribute enough to your retirement plan at work to get the full employer match.

If you work for a company that offers some type of matching contribution to your retirement plan, don’t be like the 25 percent of workers who are leaving free money behind. Take advantage of these matching contributions by at least contributing up to the matching amount. A contribution rate escalation program, if provided, can also help you reach that full matching level over time, even if it’s difficult to do now.

Step 5: Eliminate high interest credit card debt and personal loans.

When it comes to paying off loans and other debt obligations, it is important to realize that not all debt is created equal. Low interest student loans or mortgage debt are generally okay since the interest may be tax-deductible and they can help build your credit score. However, try to keep these payments under 25% of your monthly income.

For those other debt obligations with interest greater than 6% such as credits cards, the best approach is to create a plan of attack to eliminate that high interest debt first.

Step 6: Fully fund your emergency savings.

Do you have enough to cover at least 3 to 6 months of basic living expenses? The majority of Americans don’t have enough savings to cover 1 month’s worth of expenses. This is where it helps to be different than the average American and pay yourself first. Set up an automatic transfer from your paycheck into a separate savings account until you’ve built up enough savings.

If you are experiencing student loan anxiety, you may feel the urge to bypass this important step. My best guidance is to avoid this temptation and focus on building up an emergency fund first just in case a life happens moment occurs along the journey. If you participate in a health savings account or contribute to a Roth IRA, you can choose to include these funds in your emergency stash. Just keep in mind that you will typically need at least 3 months of liquid savings before investing those funds.

Step 7: Make sure you are on track to replace at least 80% of your income during retirement (or your own goal).

This is a difficult financial priority to focus on if you are in the early career stages and feel burdened by student loan debt. Paying off student loans may feel like a more urgent priority, but it is generally recommended to save at least 10-15% of income throughout your working years to achieve financial independence. You can use this retirement calculator to see where you stand and try to increase contributions as needed. See if your employer has an auto rate escalator feature which is a painless way to give your retirement savings a raise each year.

It is important to point out that the previous action steps are recommended before paying extra on student debt. If you have student loans that are starting to feel more like a mortgage payment, remember that creating a financial plan that is simple and flexible is the first step you can take to assume control over your situation. As my colleague Kelley Long wrote, she didn’t like making those 10 years of student loan payments, but she was happy to finally be done and have some other life goals completed as well.