The Impact of Student Loans on a Budget

To afford the high costs incurred by going to college, many students opt to take out student loans. Roughly 70% of American students end up taking out student loans to finance tuition, transportation, and other living expenses while they attend school.

By taking the expected salary of the field you want to build a career in, you can measure your degree’s return on investment. By default, your federal student loans will be on a 10-year repayment plan. The payments will have to be accounted for in your budget, and the common recommendation is that your student loan payment should take up no more than 10% of your income.

If you find that you are paying more than 10% of your income towards your student loan payment, or your payments are currently unaffordable, there are different repayment options available to you. Some plans will recalculate your payments based on your income, and there are also options in the form of forbearances or deferments to put payments on hold.

While these holds and other repayment options can be very beneficial in the short run, it is always good to keep in mind the impact these plans can have in the long run. Oftentimes, these plans will cost you more in interest fees and extend the timeframe of repayment.

Principal payment example.
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Because of that, it is best to stick to the standard repayment schedule or pay more if you are able to. Of course, that isn’t always an option, and getting on a different repayment plan or forbearance is a better alternative to hurting your credit score or risking the garnishment of your wages. So while these options are helpful in dire situations, it is best to minimize the time you spend using them.

Lastly, if you can afford it, putting more than 10% of your income towards your loan payment will save you hundreds to thousands of dollars in the long run. By putting extra income towards the payment, you can cut your 10-year repayment term down significantly. Should your financial situation change, you can even get a recalculated payment based on the extra amount you paid off.