It may feel like you’re never going to pay off your student loans. But the reality is, your loan does have an end date.
The standard repayment plan for federal student loans is calculated on a 10-year timeline, with the expectation that borrowers should be able to pay off their debt within a decade. If that’s unrealistic for someone’s budget, an income-driven repayment plan might allow a qualified borrower to make smaller payments over 20 years instead.
With that timeline in mind, it’s not surprising that a 2019 study from New York Life, which polled 2,200 adults about their financial mistakes, found the average participant reported taking 18.5 years to pay off their student loans, starting at age 26 and ending at 45.
But while many Americans might be student loan debt free by their 30s or early 40s, data from StudentAid.gov reveals that there are 14.2 million borrowers between ages 35 and 49, and as many as 2.3 million student loan borrowers ages 62 and older (though it’s likely that some of these older borrowers are paying down debt for their children’s education).
It can be frustrating to make payments on debt that isn’t building equity — such as a mortgage — especially while trying to prioritize retirement and also managing day-to-day expenses.
When considering how aggressive to be when tackling your student loan debt, take a lesson from people who’ve successfully paid theirs off. Sometimes, it’s best to simply wipe them out as fast as possible, but there can also be some advantages to taking your time.
How to manage your student loan payments
Not all debt is toxic; federal student loans tend to have lower interest rates, so you can feel OK about paying them off slowly while you save for other goals like retirement or home ownership. However, some people prefer to pay down student debt aggressively, which is a good route when you can afford it and feel comfortable making some sacrifices.
Before you make any plans, take a minute to look at your student loan debt. Familiarize yourself with the total balance, you interest rate and the date when your final payment is due. That will give you a better overview of how these loans could impact the other goals you’re trying to achieve.
If you want to pay off your debt quickly, consider how much you would need to pay every month to knock out your loans within a few years — and whether you can afford to make such aggressive payments. New graduates who get a well-paying job right out of college or grad school could be in a better position to do this when their cost of living is low.
For those not making a high salary right away, there may be other tradeoffs to consider so you can prioritize paying down your debt, like living with family after graduation. If you take advantage of this opportunity, make a plan to put the money you save toward your loans.
However, maybe you can’t live at home or simply don’t want to pass up your dream job in a more expensive city. If you don’t have the opportunity to live rent-free, or find yourself with even higher living expenses after college, consider enrolling in an income-based repayment plan and paying the minimums on your loans over a number of years. Public servants often go this route when they plan on qualifying for loan forgiveness. (Just be sure to stay abreast of the changing requirements for public service loan forgiveness so you qualify and are well-prepared for the tax bill.)
If you choose to pay your student loans over time, know that making minimum payments will protect your credit score. Having student loans on your credit report isn’t any different than any other kind of installment loan. In fact, it may add to your credit mix and demonstrate your ability to borrow a variety of credit products, thus boosting your score.
Making the minimum payments on your loans can also free up cash in your budget so you can focus on other responsibilities, such as saving for retirement or buying a home.
Before you dive into any of these goals, make sure you have an emergency fund stashed away in a high-yield savings account such as the Ally Online Savings Account or the Synchrony Bank High Yield Savings. Once you have an emergency fund, take the time to look for other ways you can make responsible investments that could out-earn the money you’re paying on student loan interest.
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Given that the average rate of return in the stock market tends to be above 5% when adjusted for inflation, you may decide that you’re willing to start investing before paying off your student loans in full, especially if you have a manageable APR. Recent data shows that average interest rates for student loans have been about 4.66% for undergraduates, 6.22% for graduate students and 7.27% for parents and graduate students taking out PLUS loans.
Since the coronavirus pandemic, federal student loan interest has been paused, and most outstanding balances are being charged 0% APR through Dec. 31st, 2020. Moving forward, rates for federal loans issued between July 1, 2020, and June 30, 2021 will drop to record lows at 2.75% for undergraduate Stafford loans.
If the APR on your loans is higher than what you expect to earn investing elsewhere, you may want to prioritize lowering those balances first. It can be a good idea to speak with a financial planner and do some research while you make plans. Even if you are aggressively paying off debt, you should be saving something for retirement, especially if your employer offers to match your 401(k) contributions.
Student loan debt doesn’t have to prevent you from getting a mortgage either. Work with a loan officer to determine how much mortgage you can qualify for and make sure the expense of owning a home is manageable while you’re also paying off your student loans.
When student loan debt stresses you out, take a look at your big financial picture and remember that you can still have a good credit score, qualify for a mortgage and start saving for retirement while you chip away at your loans over time.
Paying off student loan debt can be a drag, but it doesn’t have to overwhelm your life. Start by making a payoff plan, make sure you have room in your budget to cover your expenses, and then slowly think bigger, setting aside cash for a rainy day, and eventually saving for your future dreams.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the CNBC Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.