After more than a year of high inflation and recession worries, many consumers face yet a new constraint on their budgets: The return of student loan payments.
Student loan payments were paused during the Covid-19 outbreak and remained so for about three years. Now, around 44 million Americans will see those payments resume, potentially igniting concern about managing budgets and maintaining savings.
Saving amidst financial challenges is a skill that takes patience and adaptability. But if you’re reading this, you’re already closer to protecting your savings. Here are eight steps to manage your student loan payments without sacrificing savings.
1. Get informed about key dates
Understanding the timeline of student loan policy changes, as well as your specific student loan payoff dates, will help you plan ahead and make timely payments.
You may, or may not have, received a bill for your first student loan payment in three years. Borrowers should expect to receive bills in October, 21 days before the first payment deadline.
But it’s also important to keep in mind that there’s an “on-ramp transition period” — so-called by the Federal Student Aid office — until Sept. 30, 2024. Up until this date, borrowers won’t be penalized for missing a student loan payment, though the loans will continue to accrue interest.
President Joe Biden said in a press conference that “if you miss payments, this on-ramp temporarily removes the threat of default or having your credit harmed, which can hurt borrowers for years to come.”
2. Choose the right repayment plan
Choosing the right repayment plan is like choosing a diet: What works for one person might not work for another. Everyone’s financial situation is unique, and the government, recognizing this, offers a range of repayment plans.
Some plans offer flexibility based on income, while others give predictable monthly payments with a shorter repayment period. Depending on your financial needs, you’ll want to consider your income status, forgiveness options and when you want to pay the loans back by as you browse plan options.
“The lowest payment now isn’t always the best strategy,” says Tricia Kollath, CFP, co-founder of Inspired Financial Planners based in Gulfport, Mississippi. “If the loans will be paid off long before you hit the 20- or 25-year forgiveness timeline, it would make more sense to minimize the total cost over time instead of minimizing your payment today.”
Utilize the Federal Student Aid office website’s loan simulator to see which plans you qualify for and how they’d affect your monthly payments and payoff timeline.
Here’s a breakdown of the repayment plans available.
| Plan | Description | When loan is paid off by | Does it qualify for forgiveness? | Best for |
|---|---|---|---|---|
| Source: Federal Student Aid, U.S. Dept. of Education *The PAYE Plan is only eligible to those who borrowed on or after Oct. 1, 2007, and must have received a disbursem*nt of a Direct Loan on or after Oct. 1, 2011. | ||||
| Standard Repayment | Fixed monthly payments that are less than other plans | 10 years (10 to 30 years for consolidated loans) | No | Borrowers who want predictability and have steady income |
| Graduated Repayment | Monthly payments start low and increase every two years | 10 years (10 to 30 years for consolidated loans) | No | Young professionals expecting steady income growth over the next decade |
| Extended Repayment | Fixed or graduated monthly payments, extended over a longer period of time than the standard option | 25 years | No | Borrowers with high loan amounts seeking lower monthly payments |
| Saving on a Valuable Education (SAVE) | Monthly payments are 10 percent of discretionary income | 20 years | Yes, outstanding balance will be forgiven after 20 years (25 years for graduate study loans) | Borrowers with limited current income but foreseeing growth, or those with large debt |
| Pay As You Earn (PAYE)* | Monthly payments are 10 percent of discretionary income, but never more than what you’d pay with a standard plan | Variable | Yes | Those with moderate to high debt relative to their income |
| Income-Based Repayment (IBR) | Monthly payments are 10 or 15 percent of discretionary income, but never more than what you’d pay with a standard plan | 20 to 25 years | Yes, outstanding balance will be forgiven after 20 or 25 years, depending on when the loans were received | Older borrowers or those with fluctuating incomes |
| Income-Contingent Repayment (ICR) | Monthly payments are the lesser of 20 percent of discretionary income or the amount you’d pay on a repayment plan with a fixed payment over 12 years | Variable | Yes, outstanding balance will be forgiven after 25 years | Those with variable incomes seeking a shorter repayment timeline than other income-driven options |
| Income-Sensitive Repayment | Monthly payment based on annual income, only available for Federal Family Education Loan Program (FFELP) borrowers | 15 years | No | Borrowers holding FFELP loans with consistent annual income |
3. Consider loan consolidation
If you have multiple federal student loans, you can combine them into a single loan by applying for a Direct Consolidation Loan. There’s no cost to do so, and the application process takes about 30 minutes, according to the Federal Student Aid office.
However, the application can take a while to process.
“Consolidations take several weeks to complete and if you’re doing the complicated Double Consolidation strategy for ParentPLUS borrowers, you will need to leave extra time for hiccups,” Kollath says.
Some of the benefits of consolidating your loans include:
- A single monthly payment
- Potentially better interest rates (and thus more room to save)
- Access to more varied payment options.
Before applying for loan consolidation, consider the potential downsides, too: It could stretch out the loan term, and it might forfeit certain borrower benefits, such as interest rate discounts and principal rebates.
4. Let savings grow in a high-yield account
If you’ve kept your savings in the same account you’ve had since college, it might be time to look into what other options are available.
Traditional savings accounts offer minimal interest, which often doesn’t keep pace with inflation. High-yield savings accounts, on the other hand, ensure that your savings actively grow at a significantly higher rate while you’re chipping away at your student loans.
You can set up automatic transfers into a high-yield savings account to keep your savings consistent. Even contributing small monthly amounts can accumulate and compound over time.
Make sure to compare rates from a few different banks, and be aware of any monthly fees or minimum balance requirements.
Money tip:If you're comfortable with online banking, consider online savings accounts, which typically offer higher rates and less fees.
5. Revisit and revise your budget
Before diving into cost-cutting, it’s important to get a holistic view of your finances by assessing your monthly income and expenses.
You’ll need to integrate your student loan payment as an added expense. In a budget, this expense would be considered a “need” or non-negotiable expense, along with things such as rent and utilities. Financial experts commonly recommend the 50/30/20 rule, in which 50 percent of your discretionary income goes to needs, 30 percent to wants and 20 percent to savings.
If you find that there’s not much room to incorporate the new monthly payment into your “needs” income, you’ll need to find areas to cut costs. But to guard savings, it’s important that you sacrifice as little of your allocated savings as possible. Instead, consider some of these tips for making room in your budget:
- Set a limit on how many times you can dine out each month.
- If you own a car, consider if public transportation might be cheaper, or utilize an app such as GasBuddy to find the cheapest gas options near you.
- Assess your monthly subscriptions and cut one or two that are unnecessary.
- Reduce energy costs with simple actions such as unplugging electronics, using energy-efficient appliances and adjusting your thermostat.
- When you feel the urge to make an impulse purchase, give yourself 24 hours before buying it to help curb impulsive spending.
6. Automate loan payments
By automating, you reduce the risk of missing a payment, but there are other benefits, too.
“Schedule payments to be made automatically right after each pay day, so you’re not left with the proverbial too much month at the end of your money,” says Trent Porter, CFP, financial advisor and CEO at Priority Financial Partners with locations in Colorado.
Moreover, by setting up automatic payments for Direct Loans, you get a 0.25 percent interest rate deduction. That means lowered costs and more room for saving.
7. Look into supplemental income opportunities
Juggling routine expenses with hefty loan repayments can quickly drain your savings if you can’t make further cuts to your budget. It might be worth considering boosting your income to ensure you can meet all payments while still adding to your savings.
Supplemental income opportunities might be a good idea if you:
- Are struggling to meet minimum payments’
- Have a desire to accelerate loan payoff
- Have a meager emergency fund.
An additional income stream can alleviate financial pressure, allowing for more flexibility in budgeting and saving. Plus, that income can be funneled toward loan payments, potentially slashing off years of your repayment period.
Some possible ways to earn extra income include:
- Freelance writing or blogging: Freelancing is a great opportunity for those with a flair for writing. You set your own pace and can often work from anywhere.
- Online tutoring: Use your academic knowledge to tutor students. Sites such as Tutor.com and Preply can connect you with schools or students.
- Renting out extra space: If you have an extra room, consider renting it out through Airbnb. Make sure you understand tax implications and local regulations.
- Freelance graphic design: Those skilled in design can utilize their expertise to take up projects as they wish through platforms such as Upwork or Fiverr.
- Passive income streams: Consider starting affiliate marketing or building an investment portfolio. It requires initial effort but can lead to income without continuous active involvement.
8. Don’t neglect other debts
Aside from student loans, other consumer debts have also been rising. In the second quarter of 2023 alone, U.S. household debt rose by $16 billion, amounting to $17.06 trillion in total, according to the Federal Reserve Bank of New York. Other types of debt include credit card debt, auto loan debt and mortgages.
If you have multiple debts, managing them at once can be overwhelming. But it’s important that you meet all minimum payments and avoid higher interest payments and late fees.
Kollath of Inspired Financial Planners actually suggests prioritizing other types of debt over federal student loan debt. “Student loans are significantly more flexible than other loans,” she says. “Unlike other debt, if you can’t make a student loan payment, you can request a forbearance. Mortgages and rent should take priority, then auto loans, personal loans and credit cards, and finally federal student loans.”
“Once you have exhausted student loan forbearances, though, you will have to make payments to avoid default,” Kollath adds. “Defaulting on student loans can have even worse consequences than other consumer debts.”
Resources for student loan borrowers
- Bankrate’s student loan suite: Bankrate breaks down rates, repayment options, refinancing and more for both federal and private student loans.
- Student loan repayment simulator: Provided by the Federal Student Aid office, the Loan Simulator gives you a forecast of how long it will take you to repay student loans under different plans and experiment with different repayment strategies.
- FinAid’s calculators: These calculators can help you understand and compare different loan repayment options.
- National Foundation for Credit Counseling: The NFCC is a nonprofit organization that offers guidance on managing student loans, among other types of debt, and can give you an action plan for repaying your student loans within an initial 30 to 60 minute session.
- Student Loan Borrower Assistance: A resource by the National Consumer Law Center, this website provides information about student loan rights and responsibilities, as well as information on getting student loan debt relief and forgiveness.
- Public Service Loan Forgiveness (PSLF) tool: PSLF is a program that can forgive student loan debt after a certain number of payments if you work in public service or for a nonprofit organization. Use the tool to see if you’re eligible and to apply.
Bottom line
Making loan payments on time can be difficult, especially if your income is limited and you find yourself struggling to make ends meet. However, there are a number of ways to make these payments less daunting, including opting for an income-driven repayment plan and consolidating your loans.
Take advantage of the on-ramp transition period to consider what repayment plans and high-yield savings accounts work best for you. Taking the time to research and compare your options can help you stay ahead of your student loans, continue to build savings and mitigate financial stress.
