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What Percentage of Income Should Go to Student Loans?

May 22, 2019 · 5 minute read

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What Percentage of Income Should Go to Student Loans?

Millions of young Americans attend college every year. The energy on a college campus is infectious. It’s filled with hope and optimism as students pursue an education that will lead them toward the career of their dreams.

There is boundless potential. But after four (or more) years of classes, students graduate into a new reality. Gone are the inspiring classes and the constant companionship of living with your friends. Instead, students move on to jobs and a new reality: student loan payments.

It might be tempting to ignore your student loans or just stop paying them altogether. But that can have disastrous results. The consequences of defaulting on your student loans are severe and can affect areas of your financial life for years to come. And it can be near impossible to get out of paying your loans since they can’t be discharged in bankruptcy.

The earlier you can craft a repayment plan, the better off you’ll be. Research indicates that recent college graduates owe, on average, more than $37,000 in student loans, and over 44 million Americans have student loan debt.

Approximately 60% of those students expect that they’ll be repaying their student loans into their 40s.

If you’re building a student loan repayment plan and wondering what percentage of income to pay for student loans, read on. Here are some potential strategies for student loan repayment so you can determine what percentage of your income should go to paying student loans.

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.

Making your monthly minimum payments allows you to work toward repayment and avoid the consequences. Here are a few alternative tips for student loan payment as a percentage of income.

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.

You could do this by deciding on a percentage to contribute based on your financial situation. You might want to take into account the amount you have in student loans, your monthly income, and other expenses.

You could make a spreadsheet that details your monthly income and factor in all fixed monthly expenses like rent or mortgage, electric and water bills, health insurance, car payments and insurance, student loan payments, and anything else. After you’ve listed out all those expenses, you might want to add your variable expenses, like groceries, dining out, and entertainment.

Now that you have a list that details your total income and expenses, you could calculate the percentage of your income that each expense makes up. This might give you a good visual of where you are spending your money, what percentage is already going toward student loans, and how much money you have left for discretionary spending.

Now you might want to take the opportunity to review your expenses. Are you spending 20% of your income on takeout and other entertainment? Do you have a few monthly auto-payments for subscriptions you forgot about? If there are places where you can cut back and save a little money, that could be a good opportunity to reallocate an additional percentage of your regular income to your student loans.

After you’ve taken an honest look at your expenses, income, and lifestyle, you might want to decide how much you are able to contribute to your student loans. Does adding an additional 10% of your income to each student loan payment seem reasonable? Will you still be able to maintain your emergency fund and contribute toward your retirement fund?

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 will be accelerating your loan payoff—and how much this could be saving you in interest.

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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.

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.

And finally, don’t feel like there is nothing you can do to improve your existing federal or private student loans. If you are feeling trapped under piles of debt, it could be time to see if student loan refinancing is right for you. When you refinance, you could lower your interest rate, which could mean spending less money over the life of the loan.

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.

But it is important to remember 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, you can take a look at our student loan refinance calculator.

When you refinance with SoFi, there are no origination fees or prepayment penalties and you’ll gain access to member benefits like 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 your student loans could mean a lower interest rate and faster repayment. Find out if SoFi can help.

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.
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.
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 to December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since in doing so you 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 up to $10,000 and $20,000 for Pell Grant recipients unrefinanced 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.


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