How to Prioritize Student Loan Debt While Working Towards Other Financial Goals

by Sophia Bera on June 21, 2013

A common question that is brought up by my Gen Y clients is: what do I do about my student loans?  The problem is that there isn’t a simple answer.  It really depends on a few things: the amount of student loans in relation to your income, if the loans are public or private, the interest rate on your student loans, and the other goals that you’re also trying to achieve.  There is not a simple answer, but this post is designed to help you head in the right direction.

Prioritizing Your Debt

One of the first things I ask people when they have student loans is if they also have credit card debt.  If you have high interest credit card debt, I always recommend paying that off first, before focusing on your student loans.  Sometimes people are more concerned with their student loans because the number is bigger than the credit card debt, ($30,000 vs. $3,000) but because the interest rate on your credit card debt is often much higher than student loans, you should start by getting out of credit card debt.  Once you’re out of credit card debt, then you should have additional money freed up to go towards paying down your student loans.

Build up Emergency Savings First

Before making an action plan to attack your student loan debt, make sure you at least have adequate emergency savings.  I generally recommend 3 months of living expenses for dual earning couples and 6 months of living expenses for people who are single or the primary income provider.  Make sure you have enough money in the bank so that you can sleep at night.  Think through some scenarios, like what would happen if your car broke down, or a major medical expense came up, or what you would do if you lost your job.  Once you use the cash to pay down your student loans, you can never get it back, so make sure you have emergency savings.

Problem: Huge Student Loan Payments without a Huge Salary

If you have federal student loans and you’re struggling to keep up with your monthly student loan payments, you may want to see if you can switch to an Income Based Repayment Plan.  If you qualify, your monthly student loan payments will be capped at 15% of your monthly income.  According to their website, “IBR will also forgive any remaining debt, if any, after 25 years of qualifying payments.”  I always tell people who are on this plan to set up automatic payments so that they are never late and never miss a payment.  That is something that can disqualify you from this program, so be very careful to always pay on time.  There is also Public Service Loan Forgiveness in which your federal student loans may be forgiven after 10 years if you work at certain non-profits or for the government.

Bankruptcy Won’t Help You

Remember, student loans are very rarely discharged in bankruptcy, so unless your situation is extremely dire, it’s worth it to figure out a plan to pay them off.  If you are facing extreme circumstances, you can learn more about student loan cancellation, deferment and forbearance from this article on Nolo.com.

Public vs. Private Student Loans

Public loans have a fixed interest rate whereas private loans often have variable interest rates.  Since interest rates are extremely low right now, your private student loans may have a lower interest rate than your public student loans.  However, I still recommend that you try to pay off your private loans first because you will have very few options if you experience a hardship.

Focus on Higher Interest Student Loan Debt

If you’re down to federal student loans only, I generally recommend that you start by paying off the higher interest rate loans first because this will save you the most money in the long run.  Some federal student loans are at 6.8% and PLUS loans are currently locked at 7.9%.  That’s not cheap!  Start by paying extra on one loan while paying the minimums on everything else.  Once you pay off one loan, apply the full amount that you were paying towards the next loan.  Some people choose to do this until all of their student loan debt is paid off.  I’ve known people who were paying $1,000 a month towards credit card debt, and once they’re done they apply this towards their student loan debt.  I’ve known others who work extra jobs so that they can put any additional income towards paying off their loans.  However, I believe, it’s important to consider your other financial goals, while paying down your student loan debt.

Make Saving for Retirement a Financial Priority

Sometimes, Gen Y is so focused on paying off their student loans that they forget to focus on saving for retirement.  I think that this is a mistake.  It’s really hard to suddenly start aggressively saving for retirement.  I think it’s really important to start saving for retirement with your first job, especially if you qualify for a company match.  Make sure you contribute enough to get your full company match at your employer while you’re paying off your student loans.  If you don’t, you’re giving up free money.  There are not a lot of opportunities in life to get FREE MONEY, so take advantage of it!

Continue to Focus on Your Financial Priorities

As you pay off your student loans and free up cash flow, I highly recommend that you continue to use this money to apply towards your financial priorities whether that’s retirement, emergency savings, or saving for a down payment on a home.  If you’ve paid off all of your student loans that have an interest rate above 5%, then it might be a good time to turn your focus on your other financial priorities.  That’s just a rule of thumb, but it’s important to keep looking at your overall financial situation while you pay down debt.

Tools and Resources to Help

You One of my favorite websites for student loans is Tuition.io.  You can link your student loans to this website and it helps keep track of all of your balances, payments, and you can run scenarios to see the impact that extra payments will have.  There is no fee for this service, which is another reason why I think it’s great!

Ready For Zero also has a wonderful resource center for people with student loans.  They are a “company dedicated to helping people get out of debt – on their own.”

Stay Motivated By Others Successes

If you’re looking for a great blogger that writes frequently about student loans, check out Stephanie Halligan from the blog Empowered Dollar.  She has a great personal story to share about how she tackled their student loan debt.  Speaking of which, there are dozens of stories online about people who paid off large amounts of student loan debt, so when you’re feeling discouraged, I encourage you to stay motivated by reading other peoples stories.  Here are a few of my favorites:

You might also enjoy reading: