I wish someone had told me before I went to college that student loans would be an emotional drain, not just a financial one. That monthly payment can feel like it’s going into a black hole, perhaps because what it’s gotten us is so abstract: We can’t host a dinner party at our education or take our friends for a ride in our transferable skills.
A 2015 study published in the journal Social Science & Medicine found that the more money 25- to 31-year-olds borrowed to pay for school, the poorer psychological health they reported.
It’s easy to wipe out your savings account or your 401(k) to eliminate your loans if you have the savings to do it. But there are other important and, yes, boring things you should do with your money, especially if you’re earning an average income and have goals beyond kicking your loans to the curb.
So instead of throwing all your cash at your student loans, think of putting your money into buckets, says Betsy Mayotte, a student loan expert and director of consumer outreach and compliance at American Student Assistance, a nonprofit that provides student loan education.
“Everybody should be contributing something to their emergency fund, something to retirement and something to their debt, every single paycheck,” she says. Here’s how to do it.
- Solidify your savings. Before tackling your loans head-on, Mayotte suggests setting up an emergency fund. Without emergency savings, you might put unforeseen expenses on a credit card — which likely carries a higher interest rate than your student loans. Start small and set aside $25 or $50 a month until you’ve got at least $500. That pot of money will be there for you if, say, your car breaks down.
- Next, start filling your retirement bucket. Contribute to your 401(k) at work, especially if your employer matches your contributions with its own money. Contribute as much as your employer match if it’s available to you. Consider a Roth IRA if you don’t have a 401(k) option.
- Take advantage of student loan forgiveness before you focus on aggressively paying down your debt. These programs can lower the total balance you need to repay. It’s crucial to talk to your school or student loan servicer and to dig into your loan information, so you don’t miss out.
- Automate your extra payments.If you’ve got your emergency fund, you’re saving for retirement and you’re not counting on a forgiveness bonanza, you’re ready to crush that student loan balance with what’s left.
- More than half of student loan borrowers say their debt keeps them from buying a house or starting a business, according to a December 2015 survey by American Student Assistance. You can’t do either without some money socked away, which would be hard to do if you follow the advice in articles with headlines like “How One Grad Paid Off $80,000 in Student Loans in One Year.”