For the first time since the March 2020 payment stop, more than 27 million people will have a payment due on their federal student loans as of October 1.
Borrowers are reviewing their monthly spending plans to make room for forthcoming student loan payments as comprehensive federal student loan forgiveness appears to be more of a pipe dream. Yet many debtors, including me, are finding it difficult to incorporate savings into this plan.
It’s difficult to save money even though top-yielding savings accounts are currently earning annual percentage returns of over 5.00%, a record high.
Resuming student loan payments will make it more difficult to balance savings objectives when inflation is still higher than the Federal Reserve’s target. According to a recent CNET poll, 21% of borrowers anticipate postponing or delaying their savings goals to meet student loan repayment.
To assist you deal with unforeseen bills and job losses, you must have an emergency savings account. But how can you put money first if you’re anxious about paying your school loans?
In order to build a savings plan while managing student loan payments, I met with professionals to discover how to reconcile competing financial priorities.
Here are some starting suggestions from professionals.
Set a goal and manage your budget.
Due to the payment hold, many people haven’t thought about student loan payments in the past three years. But as you get ready to pay it back, examine your spending plan and rearrange your priorities to see if you can find room for savings.
To make room for your student loan payments, you might start by determining which things you can reduce or go without.
A descriptive budgeting exercise is advised by financial assistance specialist and member of CNET Money’s Expert Review Board Mark Kantrowitz. To help you classify your monthly costs as necessary or optional, use a spreadsheet or a tool like Quicken or Mint.com.
Leslie Tayne, the founder of Tayne Law Group, advises treating your savings contributions as a bill in the same way that you would your rent, electricity, and loan payments if you have wiggle room in your budget.
Make sure your commitment to your savings is “paid” before any discretionary costs, such as going out to eat and shopping, advised Tayne.
Use income-driven repayment strategies.
If you’re concerned about the size of your student loan payment after reviewing your budget, Tayne advised looking into income-driven repayment plans like the brand-new Saving on a Valuable Education Plan, or SAVE.
Based on your salary and family size, the federal government offers four IDR programs that can minimize your monthly payment.
According to the US Department of Education, one of these is SAVE, a new income-based repayment plan that replaced the outdated Revised Pay-As-You-Earn plan and is anticipated to reduce federal student loan payments for more than 1 million borrowers to zero.
If you qualify, the reduced monthly payment can make it easier for you to pay off your student loans while still building up your emergency fund and saving for other objectives.
Consider consolidating some of your existing debt.
Since early last year, the Federal Reserve has adjusted interest rates in an effort to counteract record-high inflation. While this has increased the attraction of savings rates, it has also increased the cost of borrowing, such as credit card debt: According to Bankrate, the typical interest rate for credit cards is 20.68%.
The fact that many of them have taken on additional debt is a significant factor in why borrowers find it difficult to reintegrate student loan payments into their monthly budgets. According to a recent TransUnion report, about 53% of student loan borrowers have accrued credit card debt since the start of the pandemic.
Student loan defaults should not be disclosed to credit reporting agencies until September 30, 2024, per the Department of Education’s request. Yet, handling several debts puts these borrowers at a higher risk of default.
With a 0% introductory balance transfer card, you can find relief from interest payments if you have credit card debt. Examine your credit card interest rates and annual fees to see if moving a balance could provide you some breathing room, according to Holtam.
With a balance transfer card, you can pay off your debt over time without having to pay interest on the outstanding balance. By doing this, you might be able to reduce your monthly payment and apply part of the money you save to your student loan repayment or savings objectives.
But be careful when using a balance transfer deal; if you can’t pay off your debt before the intro period expires, interest will start to rise at the standard APR.
You might think about a debt consolidation loan instead of a balance transfer offer since the latter may have less stringent credit standards. Be sure to carefully consider the prices and conditions before choosing any consolidation option.
Even though it’s more difficult than it sounds to save money and pay off debt at the same time, it is feasible. It’s important to strike the appropriate balance so that your savings don’t come at the expense of your debt or vice versa. A high-yield savings account can help you grow your money a little faster if you can easily pay off your student loans and save some money each month.
Focus on finding ways to lower your monthly student loan payment by looking at IDR plans or getting in touch with your loan servicer if you are unable to save money and pay off your debt. When you have more room in your budget, you may then turn more of your attention to saving objectives.