It is no secret that the amount of debt that the average student graduates with continues to rise. The debt load for the class of 2012 was $29,400, and seven out of 10 seniors graduated with student loan debt. A fifth of that debt was owed to private lenders, which often charge high interest rates. So, how should you pay off this staggering amount of money? Should you pay minimum repayments? Should you pay graduated repayments or income-based repayments? What if you receive a large sum of money? Should it go towards your student loans? What about paying $20 extra each month?
It may be hard to know how to best allocate your income. The answers to the above questions can be discovered when looking at three scenarios:
There’s an emergency.
Disasters always seem to come at the most inconvenient times. When your car breaks down or needs unexpected maintenance, you won’t be able to repair it by showing the repairman how fast you’ve paid off your student loan. Life is full of surprises, and if you’re eliminating your emergency fund to pay off your student loans, you may regret it. A depleted bank account is prey to an overdraft fee, so beef up your account and save for emergencies first. Aim to save at least $1,000 for your emergency fund, but set your goal at three month's worth expenses.
There’s a big purchase on the horizon.
Do you plan on purchasing a house? Once you’ve saved for the occasional emergency you can now determine how soon you want to make larger purchases. The sooner you want to buy that house, the faster you will need to pay off your student loan. Some student loans can seem like a mortgage payment due to its large monthly payments. Most people can’t manage two mortgages, so take the time to drop student loans to a manageable amount, and then start saving for the big purchases that you’re dreaming about.
There will be financial growth.
There may be financial growth now that you're working full-time, but don’t take on more debt just because you are now making more money. There is a substantial discrepancy between what most people think they will make in 5 years and what they actually make in 5 years. Be modest in your debt. As you gain job experience and potential longevity with your employer, you may create more wealth. With greater income, you will be able to put more into your school loans.
In the end, there is no clear cut answer. Establish an emergency fund. Pay off your student loans. How fast you want to tackle those loans is completely up to you and your individual situation. Don’t worry, there is light at the end of the tunnel!