After four (or more) years of classes, college students graduate into a new reality: employment and student loan payments. Navigating repayment may require planning and diligent budgeting, but with the right foundation, you can find a repayment plan that works for your personal needs.
As a general rule of thumb, the Consumer Financial Protection Bureau (CFPB) recommends limiting the total borrowed to no more than your expected starting annual salary when you leave school. But, when young students are selecting colleges and evaluating costs, it can be tough to understand or predict how much they’ll earn after graduating.
Here are some potential strategies for student loan repayment so you can determine what percentage of your income should go to paying student loans.
Calculate How Much Your Loan Costs Each Month
You’ll want to understand how much your loan costs each month. If you only have one student loan, this may be easy — the total would be your monthly loan payment.
If you have multiple loans with different lenders, you may have to do a bit more math to sum up the total amount you are spending on your loan payments monthly.
If, after calculating your monthly loan payments, you find you are spending a much higher percentage of your income on debt payments than you have outlined, you may want to adjust your budget, or see if you can adjust how much you are paying each month to your student loans.
Keep in mind that lengthening the loan term on your student loans may result in lower monthly payments, but may cost more in interest over the life of the loan.
💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.
Determining Your Student Loan Payment as a Percentage of Income
When it comes to repaying your student loans, your first goal might be to make, at the very least, the minimum monthly payment on each of your student loans. Failing to do so means your loan could become delinquent, and after 90 days of delinquency, your loan servicer can report the late or missed payments to the credit bureaus and your credit score may be affected.
If you don’t know what your monthly payments are, you can use our student loan calculator to get an estimate. It can give you a good idea of what you’ll pay each month.
To calculate the percentage of your income, divide your total monthly loan payment by your income. For example, if your monthly loan payment was $400 and your monthly income was $5,000, your loan payment would be 8% of your monthly income.
Consider the 50/30/20 Rule and Tweak it for Debt
The 50/30/20 budgeting rule outlines spending in the following categories:
• 50% of your income is budgeted toward needs
• 30% of your income is budgeted toward wants and discretionary expenses
• 20% of your income is allocated for savings and paying off debt
Using the general framework can help borrowers create a budget that makes sense for their lifestyle and needs, without being overly prescriptive. If you have a lot of student loan debt that you are focusing on repaying, you can adjust the percentage allocation so that you are funneling more money toward your debt.
Because on-time payments account for 35% of your FICO® score, setting up a budget that helps you make on-time payments each month is one of the best tips for building credit.
If you have federal student loans and are struggling to make payments on the standard 10-year repayment plan, one alternative you could consider is income-driven repayment (IDR). On an income-driven repayment plan, your monthly payments are determined as a percentage of your income.
There are four options for income-driven repayment. Depending on the plan you enroll in, the repayment term is extended to 20-25 years and payments are capped at 10% to 20% of your income. More precisely, the payment amount is calculated as a percentage of your discretionary income — the income that is left after subtracting taxes and other mandatory living expenses.
The most recent addition to IDR options is the Saving on a Valuable Education (SAVE) program, which replaces the Revised Pay As You Earn (REPAYE) program. SAVE caps payments to 10% of discretionary income (that threshold will drop to 5% for undergraduates starting in July 2024) and shields more income from the payment calculation. Additionally, if your payments are too low to cover accrued interest charges, the government subsidizes the difference so that your balance doesn’t balloon over time.
While income-driven repayment plans might help make monthly payments more manageable, extending the length of the loan means you could end up paying more interest than you would on the standard repayment plan. The good news is that if you still have a balance at the end of the repayment term, your remaining debt is discharged (although it may be taxed).
Making Extra Payments Based on Your Monthly Income
If you want to accelerate your student loan repayment, consider paying an additional percentage of your income toward student loans. If you are using a 50/30/20 budget, but want to make monthly overpayments, you may instead choose to do a 50/25/25 budget, where you reduce your discretionary spending by 5% each month and apply those funds as an additional student loan payment instead.
Only you can determine where you want to focus your financial energy. An online student loan payoff calculator could help determine how much your overpayment could accelerate your loan payoff and save you in interest.
Recommended: 7 Tips to Lower Your Student Loan Payments
Additional Options for Accelerating Your Student Loan Repayment
If your budget is already lean and you don’t have the room to contribute extra income toward student loans every month, there are alternatives that could help you speed up your repayment plan.
Part-Time Job or Side Hustle
One idea is to pick up a part-time job or find a side hustle that allows you to bring in a little bit of extra cash. Then you could focus all of your side hustle income toward student loan repayment. It’s money you didn’t have before, so your budget won’t have to make any sacrifices.
Another option is to focus any unexpected or windfall money toward student loan repayment. When you receive a bonus at work or a birthday check from Aunt Edna, you could contribute that money to your student loans instead of spending it on a splurge expense for yourself.
Student Loan Refinancing
Finally, you can also improve your existing federal or private student loan situation. Student loan refinancing could help you secure a lower interest rate, which could mean spending less money over the life of the loan.
Recommended: Should You Refinance Your Student Loans?
As part of the refinancing process, you’ll be able to select a new repayment term. Shortening the repayment term could also mean you pay less in interest over the life of the loan. You also have the option to lengthen the loan term. If you do, you’ll spend more money in interest over that longer term, but it could mean a lower monthly payment if you need to free up some cash.
When you apply to refinance a student loan, lenders will review your credit history and employment history, among other factors. Refinancing student loans with bad credit, while possible, may be more challenging. Those with a low credit score or limited credit history may want to consider establishing credit before they apply for refinancing.
Another option for borrowers with a less-than-stellar credit score may be adding a cosigner to strengthen the application. A cosigner agrees to repay the loan if the primary borrower fails to do so. Refinancing without a cosigner may make sense for borrowers who have had time to establish credit. For more detailed information, visit SoFi’s student loan refinancing guide.
It is important to note that if you refinance your federal loans with a private lender, you will lose access to federal benefits such as loan forgiveness or income-driven repayment plans.
To find out how student loan refinancing could help improve your student loan repayment prospects, use SoFi’s student loan refinance calculator.
There is no single answer for what percentage of your income should be allocated to paying off student loan debt. It’s important to make your monthly minimum payments to avoid delinquency or default. Beyond that, you may consider making overpayments to accelerate your student loan payoff.
When you refinance with SoFi, there are no origination fees or prepayment penalties and you’ll gain access to unemployment protection and community events. You can start the application online and find out what interest rate you pre-qualify for in just minutes.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
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