It can be hard to adjust a budget to include a loan payment, especially if you’re not used to making one. A good rule of thumb is to separate your budget by the 50-30-20 rule: 50% of your monthly take home income toward living expenses, 30% to discretionary funds, and 20% to debt repayment and savings. Depending upon how many loans you have and the interest rate, you may need to get aggressive and contribute 30% to debt repayment and 20% to discretionary or “fun money”.
Try and find something that works for you, but that allows for you to make progress on your loans.
Set up a Great Debt Snowball
Repeat after me: Paying off as much as you can now will pay off big time later, to prevent compound interest from accruing.
One great way to accomplish this is by setting up what is called a “debt snowball.” In the debt snowball, you list all of your loan amounts and putting those with the highest interest rates at the top. The idea is to put all of your extra money to paying off the highest rate loans, and then when that one is paid off, on to the next loan, and so on and so forth. The advantage to this is that you could save thousands on interest. Here is a great snowball calculator if you want to play around with the numbers!)
The only downside to paying down loans with the highest interest rate is that it can take a long time for someone to pay them off and feel successful. So, if it makes more sense to you to pay off smaller loans first in order to feel accomplished and empowered, then by all means- do so. Many find this ”reverse snowball” approach essential to keeping motivated with debt payoff and avoiding debt fatigue.
Keep In Touch With Your Lender
The best rule to follow is to always stay in touch with your lenders no matter what the circumstances, you may be surprised by how willing they are to work with you on your repayment terms. Many lenders would prefer to communicate with borrowers than pursue other avenues of collections.
If the unexpected happens—a medical emergency or unemployment, for example—many lenders will grant a second, additional grace period to borrowers. It never hurts to call and ask. Student loans can never be erased, not even in bankruptcy, so even if you try to avoid their attempts to contact you, eventually lenders will begin to garnish your paycheck.
If you have more than one loan with different interest rates you can consider consolidating your loans at one interest rate and into one monthly payment. Many times there are advantages to doing this, just be sure to watch the interest rate. Sometimes borrowers end up consolidating at slightly higher total interest rate and end up paying more over the life of the loan because they receive a lower monthly payment, which looks good to them in the moment. Be sure todo your homework and compare interest rates before you sign.
Of course, the important thing to take away from this blog post is that you need have a loan payoff plan and stick to it! It doesn’t matter which method you choose, just so long as you find something that works for you. Try setting up a spreadsheet in excel and tracking your numbers, progress, and eventual payoff date. This can go a long way to keeping you motivated in the long term.
About The Author
Allen Kors is the Founder and CEO of Achieve Lending, the first ever search engine for education loans. Designed to help both traditional and non-traditional students find the best student loans, Achieve Lending offers users a free online portal to search, find, and compare student loans, often in as little as 30 seconds.