Ready to Pay an extra $400 toward Student Loans Monthly?
After three years of federal student loan forbearance, Americans will contend with a familiar line item in the budget. And most aren’t ready for it.
No matter if it is you, your spouse, or even your kids, households are expected to allocate an extra $300-$400 per month toward their monthly student loan payment. With a record $3,000 of fixed household debt from housing, auto loans, and credit card debt along with competing priorities such as utilities, this is shaping up to be a financial jenga.
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Student Loan Payments Are Back? And We Can’t Avoid it Any Longer
According to the Education Data Initiative, the average monthly federal student loan payment for recent bachelor’s degree recipients is $621. However, for those with graduate degrees, that amount rises to nearly $720 a month.
The main factors that impact the monthly payment include:
- The student’s income, specifically your Adjusted Gross Income (AGI)
- The total student loan debt (principal)
- The interest rate is simply your borrowing rate with the average being 6%
- The borrower’s repayment timeline
SmartAsset provides a great student loan calculator if you want to calculate your own student loans with different input parameters.
How much time will this cost you?
If money is valued in time, how much time will this cost you? Well for most borrowers, student loan debt repayment can take up to 20 years. Unfortunately, the economic strain can put constraints on life decisions i.e. relationships, marriage, having kids, etc.
According to Lending Tree, if you owe $30,000 and have a 6% interest rate, you can pay off your loans in 10 years by paying $333 per month. The total additional interest paid will add up to almost $10,000. However, if you opted to pay them off in three years by paying $913 per month and an extra $2,856 in interest.
With prices increasing and stabilizing toward a new normal, most will be feeling the financial pain as we head into the 4th quarter of 2023.
Quick solutions to close out the year
Most people who borrow money to pay for education use federal student loans and have access to several Income-Driven Repayment (IDR) plans. These Income-driven repayment plans can reduce your payments based on your AGI from your taxes.
With that in mind, lowering your taxable income has a triple impact. You can end up saving on taxes and building real wealth while lowering your debt repayment monthly.
Funding your 401k, 403b, and/or 457b is one of the most efficient ways to lower your AGI. You can also fund a traditional IRA if you qualify based on income limits. These tools as well as an HSA funded to the max can substantially reduce your AGI by $30,000 saving you $4,000 to $6,000 (on average).
Those reductions can translate to as much as a $400 monthly reduction in an IDR.
Again all of this depends on your specific financial factors. This is something that benefited me and my wife. This is the value of financial literacy and understanding the numbers. If you need help please reach out to a certified financial planner (CFP).
Also, check out the College Investor website for more information.
On-Ramp to Avoid Default
For a lot of people who will struggle with repayment in Q4 2023, the Biden-Harris Administration created a bit of breathing room to avoid default. The Department of Education is instituting a 12-month “on-ramp” to repayment, starting October 1, 2023.
The aim is to support the financially vulnerable borrowers who miss monthly payments during this period and are not considered delinquent. As such, the Federal government’s loan administrators will not report to credit bureaus, placed in default, or referred to debt collection agencies.
Borrowers will have until September 30, 2024, to catch up on missed payments. Just remember, the interest keeps stacking up with higher balances. It’s a bit tricky so stay on your toes.
For more check out Robert Farrington, Founder of The College Investor’s ideas on what happens if we don’t pay back our loans.
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