How Much of My Income Should Go To Student Loan Payments

Although managing student loan debt can be stressful, you can minimize that stress by making sure you don’t borrow too much to pay for college. The Consumer Financial Protection Bureau (CFPB) generally recommends borrowing no more than you expect to make in one year after college graduation.  After you leave school and your loans become repayment, you may wonder, “what percentage of income should go to student loans?” Ideally, your payments will make up no more than 8% of your gross income, but your payments may vary based on your principal amount, interest rate, and repayment term. The key to managing your loans is understanding how much you can afford to pay toward them and what you can do to reduce your payments if they’re currently too high. 

Calculating Your Monthly Student Loan Costs

When you borrow money to pay for college, you agree to repay the loan’s principal and interest.  How your payments are calculated is dependent on the type of interest rate you have and the current rate. With a fixed-rate student loan, your monthly payments are the same for the duration of your loan. With a variable-rate loan, the amount of interest you pay may change over time, and your monthly payments may also fluctuate. With either loan type, a portion of your monthly payments goes toward the principal, while the remainder goes to any accumulated interest. Because interest can build over time, the total repayment cost of your loan can be significantly higher than your initial loan amount.  For example, let’s say you borrowed $10,000 to pay for college. If you qualified for a 10-year, fixed-rate loan with a rate of 5.00%, your monthly payment would be $106. Over the life of your loan, you would repay a total of $12,728; interest charges would add over $2,700 to your loan cost.  You can use the private student loan calculator to estimate your payments at different rates and loan terms. 

What Percentage of Your Income is Your Student Loan Payment?

To determine what percentage of your income goes toward your education debt, divide your monthly student loan payment by your gross monthly income (your income before taxes are taken out). For example, assume your gross monthly income is $5,000, and your student loan payments are $350 per month. To figure out what percentage of your income, divide your payment by your monthly income: $350 ÷ $5,000 = 0.07 Multiple the result by 100 to find what percentage of your income is going to student loan payments: 0.07 X 100 = 7% In this example, 7% of your gross monthly income would go toward student loan payments, which is within the recommended 8% guideline.  You can use the debt wizard tool from Mapping Your Future, a non-profit organization, to find out how much you can afford to borrow based on a certain income — or how much you need to earn to afford your student loan payments. 

Budget Using the 50/30/20 Rule

When repaying your student loans, a common question is, “how much of my income should go toward student loans?” While experts recommend that your payments be no more than 8% of your gross income, it can be smart to pay more than that if you can afford it. One of the best ways to stay on top of your student loan payments is to use what’s known as the 50/30/20 budgeting rule:

1. 50% of your net — after-tax — income should go toward essentials like housing, transportation, and debt repayment
2. 30% should cover wants like entertainment and clothing
3. 20% should go toward savings, investments, and future goals

For example, let’s say your monthly after-tax income is $4,000. If you follow the 50/30/20 rule, $2,000 of your income goes toward housing, student loan payments, and other necessities. For wants, you would have $1,200 a month. And you would have $800 per month for your savings and other financial goals.  This rule can help you manage what portion of your income goes to necessities and what portion should be saved or used to pay down student loan debt. You can use the 50/30/20 calculator from MoneyFit, a non-profit credit counseling agency, to see how much you should allocate to each category.  The 50/30/20 rule is just a guideline; if you have other debt or obligations, you may have to adjust the percentages. For example, if you have a car loan and student loan debt, you may adjust the budget to 60/20/20, with 60% of your income going toward essentials and debt repayment, 20% to wants, and 20% to savings. 

Income-Driven Repayment Plans 

If you have federal student loans and cannot afford your payments under a standard repayment plan, you have the option of enrolling in an income-driven repayment (IDR) plan. These plans calculate your payments based on a percentage of your discretionary income.  For federal IDR payments, your discretionary income is defined as the difference between your income and the poverty guidelines for your family size and state.  There are four IDR plans: 

• Income-Based Repayment (IBR): 
  • Your payments are 10% of your discretionary income. 
  • Your discretionary income is the difference between your income and 150% of the poverty guideline.
• Income-Contingent Repayment (ICR): 
  • Your payments are the lesser of: 
  • 20% of your discretionary income or
  • What you would pay on a repayment plan with fixed payments over 12 years, adjusted for your income
  • Your discretionary income is the difference between your income and 100% of the poverty guideline.
• Pay As You Earn (PAYE): 
  • Your payments are 10% of your discretionary income.
  • Your discretionary income is the difference between your income and 150% of the poverty guideline. 
  • Your payments will never exceed your payments under a 10-year standard repayment plan. 
• Revised Pay As You Earn (REPAYE):
  • Your payments are 10% of your discretionary income.
  • Your discretionary income is the difference between your income and 150% of the poverty guideline.

Source: ASPE For example, let’s say you have $30,000 in federal student loans and a 5% interest rate. If you are on a 10-year standard repayment plan, your monthly payments would be $318.  If you’re single and earn $40,000 annually, you could qualify for IBR, which bases your payments on 10% of your discretionary income.  To calculate your discretionary income, multiply the poverty guideline for your family size by 150%. Then, subtract that amount from your income. The result is your discretionary income.  $13,590 x 150% = $20,385 $40,000 – $20,385= $19,615 Since IBR’s payments are 10% of your discretionary income, your payments will be 10% of $19,615, or $1,961.50 per year. Divide that number by 12 to get your monthly payments.  $1,961.50/12 = $163.46 Under the IBR plan, your new payment would be $163.46, nearly half the original payment amount.  However, payments under an IDR plan can change as your income increases or your family size changes. You can use the Office of Federal Student Aid’s repayment estimator to see your payments under each payment plan. 

How to Pay Off Student Loans Faster

While managing student loan debt can be overwhelming, there are ways to pay off student loans faster. For example: 

• Set a budget: If you don’t already, create and follow a budget. Look for areas you can trim to free up more cash so you can make extra payments toward your debt.
• Start a side hustle: Launch a side hustle, such as driving for a rideshare service or providing childcare, to boost your income and pay off your debt faster.
• Apply for student loan forgiveness: If you work for a non-profit organization or government agency, you may be eligible for loan forgiveness through Public Service Loan Forgiveness.
• Refinance your student loans: Another option is to refinance student loans through a private lender to potentially lower your monthly payment.

Refinance Your Student Loans with ELFI

Now that you know what percentage of income should go to student loans, you can start developing a plan to repay your debt.  The benefits of refinancing your student loans are numerous; you can save a substantial amount of money, reduce your monthly payments and get out of debt faster.  With ELFI, you can refinance your loans and choose a fixed or variable interest rate. Loan terms range from five to 20 years, so you can choose a term that works for your budget.  To find out more about the requirements for student loan refinancing or to get a rate quote, visit ELFI’s website or use the student loan refinance calculator.