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How to Pay off College Debts and Still Save for the Future
Many millennials have a substantial amount of college debt. For some, it may seem that paying off these student loans will prevent them from pursuing other savings goals, such as a down payment on a house, for example. However, the two aren’t mutually exclusive. With some careful planning, it really is possible to pay off your student loans and still save for your future. Here’s how.
Create a Budget
If you don’t already have a budget, creating one is your first priority. It’s crucial to know just how much money is going in and out of your bank account, down to the last dollar. Look back over the past year and track every expense. Your budget should include your monthly income and all of your fixed costs—such as rent, car payments, student loans, insurance, and utilities—and the amounts allocated to food, clothing, and entertainment each month. Once you have that information in front of you, you can see what you can either cut or pare down. This doesn’t necessarily mean giving up eating out, but it may mean dining in less expensive restaurants. The amount you can cut is then added to your monthly savings.
Contribute to Your Company’s Retirement Plan
If your company offers a 401(k) or similar retirement plan where it offers matching contributions, strive to fund it to the maximum allowed. You don’t pay taxes on the earnings until you withdraw the money, and because these are pretax contributions, you lower the amount of money on which you pay income taxes (unless you opt for a Roth IRA). Funds are taken directly from your paycheck, so it’s not money you “miss”, and an employer matched contribution is essentially free money.
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Your money concerns would probably evaporate if you won the lottery, but that’s not the type of windfall most people experience. Many working people receive smaller windfalls from time to time, though, whether it’s a bonus, raise, or commission. Birthday and holiday cash gifts and even tax refunds may also prove significant. Rather than splurge, put this extra money into savings for your most important goals. Alternatively, put it toward your student loans to pay the balance off faster. Either way, put this money to good use and resist the urge to “treat yourself.”
Refinance Your Student Loans
If your student loan has a high interest rate, consider refinancing. If you have more than one student loan, you can consolidate them as well as refinance. Once you have established a good credit rating and have a well-paying job, you should qualify for a lower rate that can save you a considerable amount of money over the life of the loan. Just ensure you have a record of timely payments before applying to refinance.
If your current student loan rate is variable, lock in a fixed rate so you don’t have any unwelcome surprises should rates rise. If you have federal rather than private loans, you can still refinance, but avoid doing so if you think you’ll start freelancing or leave the workplace for a period. This is because federal loans have a repayment option based on a percentage of your income, and you could need to take advantage of it.
Pay Down the Principal
The faster you pay off your student loan debt, the faster you can redirect savings to something else. If you can pay a few hundred more dollars each month, you can shave years off the life of your loan. Even if you can’t pay that much extra each month, pay off as much as you can afford. Paying down the principal doesn’t require that you put in a set sum each time, so you can pay more when you are flush, and less when you have a lot of expenses.
If you would like to know more about the best ways to pay down your student loans and save for your future, contact Citadel today. We can help you develop a savings plan that works for you.