Mastering the Restart: Getting your Budget Ready for Student Loan Repayments
If you’re like most borrowers, you haven’t had to cut a check to your student loan servicer for nearly 3 years.
Maybe you’ve used that extra cash to pay off some high interest debt, build your emergency fund, or you’ve just enjoyed some extra spending money. But now that COVID is at bay, it’s time to pay up. That’s right. Federal student loan repayments are officially restarting in October.
Since 2020, the pause on student loans has been extended 8 times, but recent legislation prevents any additional payment pause extensions. You need to start budgeting for your student loan payment now.
I know, I know. Adding a big expense back into your budget is zero fun, but trust me, your wallet and future mental state will thank you for thinking ahead.
So, how do you fit your student loan payment back into your budget? The answer depends on two factors: 1.) your total student loan balance and 2.) how much FUEL* you have to work with. Let’s look at 3 different financial situations.
Scenario #1: Tina (Low Income / High Debt)
The situation: Tina makes $45,000/year. She brings home $3,000/mo. She survived 3 months of unemployment by living on credit cards, but now she’s behind on her credit card payments. Her bills (including card minimum payments) are $3,200/mo. Overwhelmed with her credit card debt, she recently applied for a debt relief program to help get her out of the negative.
The loans: In addition to her credit cards, she owes $45,000 in federal student loans. She’s never made payments because she graduated in 2020 and they were immediately paused.
The short-term solution: Tina first needs to figure out which company is servicing her loans. When asked to enroll in a payment plan she should choose an income-driven plan (for the lowest monthly payment option). Assume she chooses Revised Pay As You Earn (REPAYE), so her payment is ~$350/mo.
Tina can’t make this payment right now, but she can take advantage of the “on ramp” to repayment period. From October 2023 to September 2024, Tina won’t be charged a late fee if she doesn’t make a payment (which will be the case for a few months). Her loans also won’t become delinquent, so her credit score won’t be damaged. This is similar to how forbearance works.
Additionally, she may have an option for an even lower student loan payment next year. Beginning in 2024, the SAVE repayment plan. will replace one of the most popular income-based plans, REPAYE, and will offer even lower monthly payments. Tina could enroll in this plan. SAVE will also prevent her loan balance from growing in size when her payments aren’t large enough to cover the interest (i.e., negative amortization). This is a great repayment option if Tina decides to pursue public service or time-based forgiveness.
With a 12 month runway, Tina should get her other debts in good standing. If approved, a debt relief program could reduce her monthly payments and help her get out of the negative each month.
She should also explore ways to make a little more money each month. Can she sell some stuff on eBay, deliver groceries for Instacart or packages for Amazon via AmazonFlex, or take online surveys? Working 2 jobs may be painful for a period of time, but it’s only temporary.
Lastly, Tina should take this questionnaire to check for any financial assistance programs she may be eligible for in her state. Many states offer financial support for utility bills, food, and even cell phone payments.
The long-term solution: Loan forbearance, side hustles, debt relief, and government assistance programs ‒ these are great temporary solutions to help her while she’s in a bind. But eventually, Tina needs a different strategy to address her student loans. Once Tina has positive cash flow each month, she should determine if she can pay them off in 10 years. If not, that’s OK. Tina can pursue time-based loan forgiveness.
Scenario #2: Anna (Moderate Income / Moderate Debt)
The situation: Anna’s salary is $65,000/year. She brings home $4,000/mo after-taxes and spends $3,900/mo. She’s been using her FUEL ($100) to grow her emergency fund. Her income has increased over the last 3 years, but so too have her expenses. She lives in Washington, D.C. and her rent alone is $1,800/mo.
The loans: She owes $45,000 in federal loans. Before the pause, she made payments on the REPAYE plan. She paid $350/mo.
The short-term solution: Anna can continue with REPAYE in October, however, she’ll need to recertify her income. When she does this, her payment will increase because she’s making more money. Assume her payment jumps to $450/mo. She can use her FUEL ($100) to make a partial payment, but where will the remaining $350 come from?
The first place Anna should look is, you guessed it ‒ her budget. What expenses can she cut? How long can those expenses remain cut? Can she cut lots of small expenses (like eating out, happy hour, etc), or does she need to make more aggressive cuts (like lowering her rent and/or getting a roommate)? Anna should start with what she can control.
What if Anna can’t cut $350 out of her budget? Like Tina, maybe she explores some part-time income opportunities.
In the meantime, she should pay what she can on the loans to prevent the balance from growing (remember, interest starts accruing in September). The 12 month “on ramp” to repayment period also spares partial or incomplete payments from being charged a late fee, so Anna’s not penalized for just paying $100/mo. She should also call her loan servicer to explore options that could lower her payment until she can afford the $450/mo.
Like Tina, Anna could also enroll in the new SAVE repayment plan to lower her payment. But over time, she’ll need to work on earning more or spending less to have more FUEL to pay off the loans.
The long-term solution: Anna’s loan balance ($45k) is almost her entire salary. Once she’s comfortable making the payment, she’ll need to explore a long-term strategy to help her eliminate the loans.
Like Tina, she should start with a 10 year payoff period. How much would she need to pay each month to have loans paid off in 10 years? Can she make that payment work in her budget? Great! Do it and don’t look back. If not, time-based forgiveness might be a smarter option, especially if she doesn’t expect her income to increase much more.
Scenario #3: Jane (High Income / Low Debt)
The situation: Jane received a big promotion this year and now makes $150k/year. She brings home $9,500/mo and spends $7,000/mo. She’s made a few extra payments on her student loans throughout the pause but hasn’t prioritized paying them off. She’d rather invest her FUEL ($2,000). Jane’s rationale is that a high-yield savings account pays 4.75% and her student loans cost her 4%, so why not make some money?
The loans: Jane has $24,000 left on her federal student loans. Before the pause, she was on the 10-year payment plan paying $700/mo. She’s made payments on her student loans for 7 years and she’s at the tail end of her repayment journey.
The short-term solution: With $2,000 of FUEL, Jane can comfortably afford her loan payment when it restarts. She has 2 options:
- Option 1: She dumps the extra $1,300 of FUEL on her loans. After they’re paid off in 12 months ($24,000 / $2,000), then she can direct the full $2,000 into her high-yield savings account. In 3 years, she’ll have ~$48,000 in a savings account ($2,000 x 24 mos) and no student loan debt.
- Option 2: She could stay the course with her regular payment and invest her remaining FUEL ($1,300) into her high-yield savings account. It would take ~3 years to pay off her loans ($24,000 / $700 = 34 mos), but she’d have ~$44,000 in a savings account ($1,300 x 34 mos) and no student loan debt.
She can’t go wrong with either option.
I know that student loans are no fun to think about or pay off (for real, it took me 7 years to pay off mine). But remember, the smartest plan is one where you’re paying off the loans, not just making a payment on the loans. Start planning now for your loan payment restart and pick a long-term pay off strategy that works for you. You got this!
*FUEL = Take home pay - Total monthly expenses
