How To Prioritize Savings Goals When Paying Down Student Loans

Got student loans? We’ve got you covered with our Student Loan Smarts blog series. Our expert tips and hacks will help you save money, pay off loans sooner, and stress less about student loan debt. Read the other posts in the series to get all the info you need to make intelligent decisions about your student loans.

Student loan debt can cause you to delay important life decisions, such as those around marriage and family, or postpone big savings goals like buying a house. But by refinancing, you won’t have to put your dreams on hold. All you need is a little guidance and a plan.

Student Loan Refinancing: Choose Your Own Path

When choosing between a fixed rate and a variable rate loan, and determining term length, your current circumstances, and future goals make all the difference. For example, is your primary focus now on monthly savings or lifetime savings? Do you want to buy a home within the next year or do you want to travel the world once you retire? Or do you want to do both?

Borrowers choose to refinance student loans for many reasons. Consolidating multiple loans into one monthly payment will appeal to some, while others might prefer to turn a high fixed rate into a lower variable rate to reduce student loan interest payments. Still, others may want to lengthen or shorten their loan terms to better align cash flow to their savings and spending goals.

Recommended: Save For Retirement or Pay Down Student Loans — Where Should You Focus

Before deciding which student loan refinancing option is right for you, think about where you are now and what you want to achieve down the line. Lengthening the term of your loan and choosing a fixed rate could lead to predictable monthly savings and help make room for spending on a car or a house. On the other hand, shortening your loan term and opting for a low variable rate could lead to thousands in savings over the life of the loan, allowing you to reroute cash for your future goals, including retirement.

Neither path is better than the other. In fact, you might even choose both: opt for a lengthier term when you’re young and need monthly cash flow to get into a new house, for example, and then refinance to a shorter term loan later in your career when cash flow is more abundant. Take the time to think through your savings goals and do the math before deciding to refinance, and you’ll see that a few tweaks can go a long way.

Calculating Your Savings Goals

Consider these two scenarios: one in which it makes more sense to opt for monthly savings, and another where it’s better to opt for lifetime savings.

Say you’re a young professional just starting a family and aiming to buy your first home in the next 12 months. Currently, you pay $672 monthly on a 10-year $60,000 school loan. Your priority may be to reduce that payment, capturing monthly savings to make room for the mortgage coming your way. Refinancing a 10-year loan with a fixed rate of 6.21% to a 20-year variable loan with a rate of 3.58% could save you around $340 monthly, depending on market conditions.

Related: Love and Loans — How Couples Can Pay Down Student Debt and Build A Joint Financial Future

On the flip side, say you’re a successful entrepreneur in your mid-30s, who already owns a home. At this stage in life, it could make more sense to shorten your student loan term and capture lifetime savings. Say you owe $60,000, which is to be paid over 10 years at a 6.21% annual rate. Because you’re entering your prime earning years, refinancing that student loan to a fixed 3.5% rate over five years could have you out of debt faster and save you an estimated $15,206 for investing in a stock fund or perhaps, putting a down payment on an investment property (or that dream vacation home!)

We built each scenario using a Student Loan Calculator. Plug in your own figures to find out which refinancing option will help you best achieve your unique savings plan.

Improve Your Student Loan Smarts to Reach Your Financial Goals

Freeing up cash flow to get into a home when you’re young can produce big long-term benefits, especially if you buy into a neighborhood on the rise and build up equity fast. Conversely, paying off debt early can free up cash for investing in retirement and the occasional big-ticket indulgence, like a nice vacation.

Let your circumstances and longer-term goals dictate the terms of your student loan, not the other way around. SoFi can help you to discover the best student loan refinance rates available to eliminate loan debt.

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The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
The individuals interviewed for this article were not compensated for their participation. Their advice is educational in nature, is not individualized, and is may not be applicable to your unique situation. It is not intended to serve as the primary or sole basis for your financial decisions.