How Much of My Discretionary Income Should I Put Toward My Student Loans?

By
Zina Kumok
,
January 10, 2019

Living with student loan debt can feel overwhelming, but no debt is insurmountable if you know how to tackle it. If you have the right strategy and a positive attitude, you can find your way to a better financial future.


Once you’ve started making your payments on time and in full, you’re ready for the next step: finding more money to put toward those loans, which for many people means dipping into their discretionary income.


But how much of that money is it appropriate to allocate for loan payments, and what other financial obligations should be factored in? Read below for the answers to those questions and more.


What Is Discretionary Income?


Discretionary income is what’s left over at the end of the month after you pay the bills and put aside money in savings. Once you’ve taken care of the essentials, discretionary income is the money that remains. Most people spend discretionary income on things like meals out, movies, and concert tickets.


Discretionary income can also include windfalls, bonuses, rebates, tax refunds, and other financial surprises. If you’ve received an unexpected injection of cash, chances are you can classify it as discretionary income.


Discretionary income likely varies every month because of variable expenses. Unexpected or irregular items like car registration fees, gifts, or vet check-ups will affect how much money remains in your bank account.

How Do I Calculate My Discretionary Income?


The only way to figure out how much discretionary income you have is to track your spending and your income. This is especially important if you’re self-employed or paid based on tips or commissions.


If you don’t budget already, start a system to manage how much money you earn and how much you spend. You can do this with an Excel or Google spreadsheet, an online program like Mint or You Need a Budget, or a basic pen-and-paper system. The key is to pick a method that works well for your lifestyle and personality.


Every month, calculate how much you spent on the essentials and other items, then tally up your discretionary income. Make sure to include your minimum loan payments as part of your pre-discretionary income.


How to Divide My Discretionary Income?


It’s best to divide extra money between multiple savings goals, not just your student loans. You might want to save for a new car, create an emergency fund, or go on vacation. Don’t feel pressured to put 100 percent of your extra money toward your student loan balance. Remember, you’re still making your regular monthly payments.


Pick how much you want to save for other goals and then choose how much extra you want to contribute to your student loans. Create automatic payments for that amount, unless your discretionary income is boosted by a windfall in a given month.


Most student loan providers allow you to make extra payments on your principal online or over the phone. Every time you make extra payments on your student loans, you reduce the principal and decrease the total debt payoff time. It’s also important to let your lender know that you want your payment to go toward your balance/interest, or else it may be treated as an early occurrence of your next monthly payment.


If your discretionary income varies, you can make extra payments manually. The best way to do this is to make the extra payment the same day as your minimum payment. This way all of the bonus money goes toward decreasing the principal.


One important note: some lenders will actually penalize you for putting extra money toward your loans, so you should check with your lender before you make any additional payments. CommonBond never penalizes borrowers for making early or extra payments. If your lender does, it might be time to consider refinancing with a new one.


Should I Pay off My Student Loans Early or Save for Retirement?


When people have extra money sitting around, they often want to choose between saving for retirement or paying off their loans faster. Some like the psychological benefit of being debt-free while others enjoy seeing their retirement account grow rapidly.


There’s no right answer as far as what to focus on, but there are a few guidelines to follow.


First, create a number in your budget that would cover both extra debt payments and retirement funds. Find how much you absolutely need for the basic expenses, including a simple saving threshold.


Then, add in some funds for entertainment, hobbies, and travel. Being completely deprived won’t make your debt payoff journey any more pleasant and can lead to unexpected splurging.


Once you have that final number, compare it to your net income and subtract it to find out your final discretionary income total. You can then divide that figure between extra student loan payments or retirement, focusing on what’s more important to you.


Make sure not to take money away from other savings goals, like emergency funds, car repairs, and home repair. Saving holistically is important to good financial health.


Talk to a financial planner if you’re still not sure how to divide your income. Making the right decision now could save you thousands later on.

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