Post-college life

How much of my discretionary income should I put toward my student loans?

How much of your budget should go towards paying off your student loans? Should you be paying more than your minimum bill each month, or diverting extra cash to other savings goals? Of course, there isn’t one right answer for everyone. Here are steps you can take to find the right number for you.

1. Determine what you’re working with

Start with your monthly income. How much money typically hits your bank account each month after taxes have been taken away? This is the starting point for your budget.  

2. Add up your fixed expenses

Next, figure out what part of your monthly income is already spoken for. These are expenses that stay the same each month, like rent, cellphone and internet bills, and fitness memberships. Include your current minimum student loan payment and any minimum credit card payments, too. As a benchmark, the general rule of thumb for fixed expenses is about 50% of your budget.  

Why this millennial refinances her student loans every year

3. Set aside a cushion for irregular expenses

Make a list of expenses that tend to come up every year, but not on a monthly basis – things like annual memberships, trips to the vet, haircuts, holiday travel, and gifts for friends and family. Estimate these expenses for the year, then divide by twelve to spread out the cost over the year. Consider that amount spoken for in your monthly budget, too.  

4. Evaluate what’s left over

Whatever is left over is for you to divide between your day-to-day spending (like groceries, eating out, and hobbies), savings (like for retirement, a down payment, or a travel fund), and additional debt payments (like your student loans or credit card balances). A general rule of thumb is to put at least 20% toward saving and additional debt payments, and 30% towards day-to-day spending.  

Tip: While it may be tempting to throw everything at your student loans (or investing, or your travel fund...), consider establishing a safety net first to help guard against going deeper into debt if an emergency arises. That means building up at least three to six months of income in an emergency savings account – and a minimum of at least one month of income before increasing any contributions to other savings or debts.

5. Adjust based on your goals

Now that you’ve got a baseline budget, it’s time to do some fine tuning to see how much more you can put toward your student loans and other goals. Start with some simple projections: calculate what it would mean to put X amount per month towards your loans, retirement, down payment fund, or other savings goals. What will those balances look like 3, 5 or 10 years from now? Understanding the implications of your monthly allocations can help inform your decisions on how to distribute your discretionary income. It may also motivate you to find places to cut down on your fixed or day-to-day expenses so you have more to put toward your goals.  

Focused on getting debt-free? You can make significant progress on your student loan balance by refinancing to a shorter-term loan, which will most likely come with a higher monthly payment but lower rate and faster timeline. You could also qualify for a better rate if your credit score, income, or market rate have improved.  

Ready to make more progress? Explore new rates and payment plans.

Not sure you can commit to a higher minimum payment? You can still make progress and speed up your timeline by paying more than your minimum each month. Set up an automated transfer from your bank to make your extra payment on the same day that your minimum is due.  

Note: CommonBond will not penalize you for making early or extra payments. If your lender does, it might be time to consider refinancing with a new one.

A few more tips consider:

  • After emergency savings, prioritize paying off high-interest credit cards
  • Take advantage of any 401k matching offered by your employer (it's essentially free money)
  • Even without 401k matching, don’t wait until your loans are paid off to start saving for retirement – you'll lose out on the power of compound interest. Start with a small automated transfer that you can set and forget. Even $100 a month is a good place to start.  
  • Automate as many of your transfers as possible – it’s the best way to build good budget habits
  • Make a plan for windfalls – decide now how you want to treat bonuses, tax refunds, and other windfalls, then make the necessary transfers as soon as the extra cash comes your way
  • Got a mortgage? Just like your student loans, there’s a chance you can refinance to a lower rate.
  • Set a calendar alert to revisit your refinance options and budget once per year.  

Start your saving today

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