How To Create A Budget with Student Loan Debt

I was recently quoted in Money.com in an article that addresses how much of your income should go to student loans each month. Here is a link to the piece.

https://money.com/income-monthly-budget-student-debt/

Most student loan borrowers have not been making payments on their student loans for almost a year now.  Some of my clients have continued to pay down the principal, but the majority have decided to redirect their money to other places.  The US Department of Education recommends that students not borrow more than 8% of their projected income to have an affordable student loan payment.  The issue that I have seen with most college students is that they do not have a clear idea of how much they will make when they graduate.  They also are not aware that interest on most loans continues to accrue while they are in school, resulting in a much higher balance when the interest capitalizes after they graduate.  

When I work with clients who have just graduated and have significant student loan debt, the first step is to determine the best strategy for repaying their loans.  Many times they also have accumulated significant credit card debt as well, so it is important to develop a debt repayment strategy so that the debt with the highest interest is repaid first.  I start with determining a client's take home pay, and then add back their retirement contributions to obtain their available income.  I usually recommend that they spend no more than 60% on basic living expenses including housing, utilities, car payment and minimum student loan and credit card payments.  I then recommend that they save 20% of their available income or repay debt that exceeds their minimum payments.  I usually recommend that they first establish an appropriate emergency fund, and then repay the debt with the highest interest rates first.  After this, I usually have them start investing in their retirement account and saving for other goals.  As the debt is repaid, they can contribute more towards their savings.

It is critical that the borrower understands all of the alternatives available for repaying their student loan debt.  Some income driven repayment plans allow you to pay just 10% of your discretionary income for your monthly payment. This can be significantly lower than the standard repayment plan.  This is also important for younger people that are just starting out and are trying to buy a home.  It is best to have the payment on your student loan as low as possible so that your debt to income ratio is lower which can allow you to qualify for a larger loan if needed.

Trying to repay student loans while balancing housing costs and saving for other financial goals can be confusing.  I try to develop a short term strategy so that my clients can get on the right track and can start working toward achieving their financial goals while using the optimum strategy for debt repayment.

About the Author

Patti Hughes is a Chicago Fee-Only Financial Planner.  Lake Life Wealth Advisory Group provides comprehensive and objective financial planning, retirement planning, and investment management to help clients organize, grow and protect their assets through life’s transitions.  She is a fiduciary, and does not sell products or earn commissions, so she truly acts in the best interests of her client