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What Percentage of Your Income Should Go to Student Loans?

By Kayla McCormack · November 21, 2022 · 6 minute read

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What Percentage of Your Income Should Go to Student Loans?

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.

A general rule of thumb suggests that students avoid borrowing more than 20% of their discretionary income. 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.

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 expense

•   20% of your income is allocated for savings and paying of 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.

Income-Driven Repayment

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. 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, and depending on the plan you enroll in, the percentage of your income used to determine your student loan payment amount ranges from 10% to 20%. More precisely, the payment amount is calculated as a percentage of your discretionary income — the income that is left after taxes and other mandatory charges and expenditures on necessary items.

If you are repaying your loans on an income-driven repayment plan, the term will be either 20 or 25 years, depending on the plan you selected. 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.

Making Extra Payments Based on Your Monthly Income

If you are interested in accelerating your student loan repayment, you might want to 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 spend an additional 5% each month to make an additional student loan payment.

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 how much this could be saving 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 an additional percentage of your 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. If it’s money you didn’t have before, so you may not miss it coming in.

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

And finally, don’t feel like there is nothing you can do to improve your existing federal or private student loans. 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 refinancing 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 to 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.

The Takeaway

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.

Refinancing student loans with SoFi could mean a lower interest rate and faster repayment. Find out if SoFi can help.


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SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.

CLICK HERE for more information.


Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.


Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website
.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
External Websites: 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.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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