Tips for budgeting your student loan payments

How to create your budget

When it’s time to make payments on your student loan(s) you may feel overwhelmed. Unless you’re independently wealthy, you probably don’t have piles of extra cash sitting around. One solution? Organize your finances by making a budget. Here are some tips on how to create a budget and how to fit your loan payments into your financial life.

First, know what you owe

You can’t get ready to make payments if you don’t know how much they’ll be, right? The first step is to figure out what loans you have, how much the payments will be, and when you need to make payments.

You probably have more than one student loan—and likely there’s a mixture of federal loans and private loans. A few months before your payments are due, you’ll hear from your servicer(s) with info on the amount and the due date. If you don’t know what loans you have, or even who your servicers are, here’s how to find out:

• Federal loans: Visit the National Student Loan Data System for your loans and servicers.
• Private loans: You can request a free credit report from annualcreditreport.com that’ll list the student loans reported to the consumer reporting agencies. (Most servicers report their loans to these consumer reporting agencies.)

Your servicers will send you your actual loan payment amounts about a month before it’s due. You can also estimate your payments with online calculators (like this Student Loan Repayment Calculator) by using your loan total and interest rate.

The amount that you’ll be paying on all your loans will include both principal and interest. (This starts after a grace period, which is usually 6 months after you leave school.) Principal is the amount you borrowed, plus any unpaid interest. Interest is the amount you’re charged for borrowing the money.

Once you’ve estimated your payment, you can make a simple spreadsheet listing each loan, its interest rate, when payments will start, the amount of each payment, and the servicer.

A budget tracks money in, money out

A budget is simply a record of how much money you have coming in (income) and how much goes out (expenses) each month. Think of it as a plan for how you use your money. You don’t have to be a math whiz to create a budget; it can be as simple or complex as you feel comfortable with. There are lots of online apps to choose from—you can even start with a simple, free, downloadable version like this one.

To understand your income, look at paychecks from a few months, if you have them. Use your “net” income (the money you make after taxes). If you don’t have a regular paycheck or work freelance, estimate your income—you’ll need to subtract estimated taxes from that amount. According to the IRS, the self-employment tax rate is 15.3%.^{footnote 1} Don’t forget to include any side hustles or other money that comes in regularly.

Next, figure out your expenses: rent, food, utilities (including phone), streaming services, transportation (including auto loans), clothes, and entertainment. The more honest you can be, the better your budget will be. (If this includes eating out five days a week, include that too—it’s an expense.)

Once you’ve got your income and expenses, add your expected student loan payments to the mix. Then you’ll be able to see what your monthly balance/loss will be.

Is there a “right” way to budget? 

If you do a search for “budget,” you’ll see several techniques. One that’s been used for years is the 50/30/20 budget.

-   50% of your income goes to your “needs”: rent, utilities, transportation, insurance, groceries

-   30% of your income goes to your “wants”: dining out, clothes, gym membership, streaming services

-   20% of your income is for savings and debt repayment: student loans, auto loans, credit cards; and emergency savings

This may not work for you if you have an entry-level job; your student loans may eat up a larger proportion of your budget. But it can be useful for thinking about expenses in terms of wants vs needs. Wants are often the areas where you can look to find some extra money to put toward your loans each month.

Other budgeting plans include paying yourself first—you figure out what you can save every month (especially for emergencies)—and then take care of your expenses…everything else is for “wants.”

There are also people who like “cash stuffing” (an envelope system). This has you take actual cash and allot it every month by putting it into separate envelopes for each category, like rent and groceries. Once the envelope is empty you can’t spend any more in that category.

What if you can’t make your student loan payments?

If you’re first starting out, incorporating student loan payments into your monthly expenses may be challenging. And it may mean cutting back on some “wants” (streaming, dining out, entertainment) for a while. One thing you shouldn’t do is ignore your payments—this could cause your account to go into default and damage your credit. You can pay a portion of your bill, but interest will keep accruing (growing) and you’ll end up paying a lot more than if you paid in full each month.

Here are some things you can do:

For federal loans

• If you work (or have worked) in public service in the federal, state, tribal, or local government, or for a non-profit organization, see if you’re eligible for the Public Service Loan Forgiveness program.
• Refinancing may be an option, but understand that you might have to give up federal student loan benefits like income-driven repayment (IDR), forbearance and deferment, and Public Service Loan Forgiveness.
• If you’re in a temporary financial bind, deferment or forbearance might help you suspend payments for a short time.

For private loans

Call your servicer and let them know that you’re having trouble. Individual servicers may have programs or other options to let you make lower payments until your financial problems get better.

Financial independence begins with a budget

The important part of getting ready to make loan payments is to be proactive. Create a simple budget to get a sense of where your income and expenses stand. Simple or advanced, a budget can help you figure out what you need to spend money on…and where you might be able to cut back. If your goal is to be financially fit, a budget can be the first step to achieving your goals.