With federal student loan payments set to resume in October, you might be wondering how to rework these payments into your budget – and if times are tough, what priority they should take over other debts.
It’s a difficult question to answer: How do you allocate your money to make sure you are meeting deadlines without overdrawing accounts or racking up interest?
“Prioritizing debt is not only about interest rate or amount,” says Jack Wang, wealth advisor at Innovative Advisory Group. “Factors such as liquidity, emergency fund, cash flow and stability of income are also important.”
He adds, “Paying student loans is important, but depending on circumstances, paying other debt may still take priority.”
When Will Federal Student Loans Start Accruing Interest Again?
The student loans pause will end on Sept. 1, 2023, and interest will start to accrue on that day. Essentially, the payment pause set interest rates for federal student loans at 0%, and those will return to their standard fixed rate in September.
How to Prioritize Student Loan Payments vs. Other Debts
Making your student loan payments is important, especially because defaulting can hurt your credit score, according to Wang. But if you are in a situation where you have to choose which bills to pay, they might not take first priority.
Your first priority should be paying for necessities like shelter and food, according to Andrew Housser, co-CEO and co-founder of Achieve, a digital personal finance company.
“This means paying at least the minimum due on secured debts, which include a house (mortgage payment) or car (vehicle loan),” says Housser. “Of the two, it’s usually best to pay the housing bill first. That’s because you could risk losing your place to live should you miss payments there.”
Then, he says, student loan debt is your next priority, primarily because it is so difficult to discharge.
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“Pay at least the required amount on your student loans each month,” Housser says. “If you are struggling to make a payment, do not ignore the issue. Contact your loan servicer right away and see what suggestions they can offer.”
He also says that you shouldn’t forget credit card or other debt, as interest can rack up quickly, though these take third priority. Other experts, including Lei Han, certified public accountant and associate professor of accounting at Niagara University, say it depends on your interest rate, as you might be paying more in interest on credit card debt than your loans.
Should You Pay More Than the Minimum?
Maybe you have the funds available to make your student loan payments and juggle other financial necessities, but you wonder whether to make more than your monthly payment to chip away at the overall cost. Should this take priority over other financial goals?
According to Wang, the answer depends on the individual.
“Balancing between the two is really the head versus the heart. It is a very personal decision that is based on more than just the numbers,” he explains. “Objectively, saving should take priority over debt as interest on savings can compound but interest on loans stop when the loan is paid off.”
Still, many people don’t like having student debt hanging over their heads, so paying down their loans more quickly may relieve stress if they have the funds, he adds.
That said, avoid paying more than the required monthly payments if you’re planning to take advantage of federal income-driven repayment loan forgiveness, Teacher Loan Forgiveness or Public Service Loan Forgiveness programs.
Additionally, money moves that directly impact your financial security might take priority over extra loan payments. For instance, setting up an emergency fund should come before paying down low-interest debt.
Tips for Managing Student Loan Payments
For those struggling to manage their student loan payments, there are ways to ease the burden.
- Rebalance your budget. Once you understand your payment priorities, it’s time to examine your current budget. You might be able to reduce discretionary spending to free up money for payments.
- Seek an income-driven repayment plan. According to Housser, these plans are designed to help borrowers find a monthly payment that is affordable for their current financial situation, based on family size and current income. “However, understand that they are complex and deserve some research time,” he warns.
- Refinance your loans for a better rate. Like with a mortgage or car payment, you might be eligible to take out a new private student loan for the purpose of scoring a better interest rate than you’re currently paying. You’ll need to pay special attention to the new interest rate, repayment length and other terms to make sure you’ll actually save on the total cost of the debt, but it can be a good option for those who need to reduce monthly payments.
- Consolidate loan payments. Those juggling multiple student loans with varying terms might benefit from a loan consolidation, which will reduce your number of monthly payments. This can be done via a federal program for federal loans or a single new private loan for any combination of federal and private. However, the process might also extend the repayment term, which can cost you more over time. Also, if you consolidate federal loans into a private loan, you will lose certain benefits.
- Find alternate sources of income. If you’re struggling to cover bills and don’t want to add more debt to your plate, consider looking into options for bringing in additional income, like a side hustle.