When to Start Paying Down Student Loans
After you graduate college, you get six months before your student loans start requiring monthly payments. Unless you get a deferment or forbearance, you will have to make at least the minimum payments. The good news is that most student loans, especially public loans, have a fairly low interest rate. At some point though, it would help to start paying more than the minimum on these loans. Once all of these conditions have been met, it’s time to start throwing serious money and eliminating this debt:
After You Have an Emergency Fund
Most financial experts will tell you to have 2-9 months of an emergency fund saved up in case you lose your job or something major happens. This money should be easily accessible, usually in a savings account, to protect you financially if you need a significant amount of money immediately.
Financeography Tip: You can learn more about your student loan repayment, consolidation and forgiveness options through the Student Loans Removed website.
While an emergency fund should be one of the first things you do when you start tackling your debt, there is a caveat to this and it involves paying down high interest credit card debt first. The logic behind this is that instead of an emergency fund, which might earn 1% a year (if that) you will be saving much more by paying down debt with much higher interest rates, if it is consumer debt. If you do get into serious trouble, you can use those credit cards as a lifeline and either pay it off with your emergency fund or at least be out less money than by letting the high interest rates continue to build.
After Higher Interest Debt is Paid Off
Credit cards will almost always have a much higher interest rate than a student loan and should be paid down first. Not only will it save you more money in the long run, it will have a positive effect on your credit, opening up plenty of opportunities in the future.
Some car loans will also have a higher interest rate than your student loans and should take priority since you cannot hop in your diploma and drive to work in order to sustain yourself.
Many mortgages, especially if you have received one in the past few years, will have a similar or lower interest rate, but will likely be much bigger. While you cannot live inside your diploma (unlike a house), you can pay off the student loan debts faster than a mortgage, freeing up more of your income.
After You Contribute the Most to High Yield Retirement Accounts
The younger you start saving, the more you are going to end up with when you decide to retire. Some retirement accounts have been gaining 5-8% a year, and that’s before employer matching. Investing at least up to the employer matching threshold will get you the best return for your money while riding the markets ups and downs in the coming years.
Time to Pay Down Student Loan Debt
Once all of the above conditions have been met, start paying more than the minimums on your student loans. While you will not realistically turn to ramen dinners and forego everything but a bare-bones existence to do this (it’s ok to live a little), the faster you pay it off, the more money you will have to spend however you want. If you have multiple loans and they are all around the same interest rate, start by paying off the smaller ones first, reducing your total number of accounts on your credit report.
When to Only Pay the Minimum
Interestingly, there are a few circumstances when you should never pay more than the minimum on your student loans. If you work in the public sector (teaching, first responder, public defender, AmeriCorps/Peace Corps) your federal student loans can be forgiven after you make 120 minimum monthly payments. For those with fairly high incomes and lower amounts of student loan debt, your monthly minimums may be enough to pay the debt off before you reach the full 10 years of on-time payments.
Large student loan debt and relatively a small salary, especially if you are on an income-based repayment plan, can be great for loan forgiveness, allowing you to be free of your student loan debt after 10 years.
To find out more about how to best manage the repayment of student loans either in your grace period or afterwards, you might want to see how much you could be repaying through the Student Loans Removed calculator.