Advertisement
  1. News
  2. /
  3. Business

Dear Penny: How do I pay back $80K in student loans on a $42K salary?

Pace yourself. There’s a lot to balance.
How do I pay back $80K in student loans on a $42K salary? [GRADYREESE | Getty Images]
Published Sep. 16

Dear Penny,

I just got my first “real” job after graduating from college in May. My salary is $42,000, and I’m 23 and single. I have $80,000 worth of student loans (about $50,000 federal and $30,000 private).

I know I need to pay off my student debt, but I also need to save an emergency fund, save for retirement, etc. I also have about $3,000 on a credit card. How do I prioritize? I’m feeling overwhelmed.

-H.

Dear H.,

I suspect that you’re overwhelmed because you’re in a time of life when there are so many things you’re supposed to prioritize right now: Get out of debt. Save for retirement and emergencies. Negotiate a decent starting salary, even if your resume is scant.

So often, the advice boils down to: If you just make X move now, you’ll amass great fortune and success, and you’ll never have to worry about money again.

Sometimes, it’s great advice, though often it comes from people who haven’t lived on an entry-level salary in decades and who have never tried to pay down a student loan balance that’s nearly double their starting salary.

Sometimes, it’s superbly unhelpful. People tell you how you should have never taken out the student loans in the first place, picked a cheaper school or chosen a different major — as if you had access to a time machine.

You can only stretch $42,000 so far, so yes, it’s going to be a challenge to save money while paying off $83,000 debt. But I don’t think your debt is insurmountable.

Consider that your friendly advice columnist here gets letters from people who are approaching retirement with similar amounts of student loan debt. You’re 23. You have time on your side.

But you need to be strategic about how you pay off debt.

I suggest getting your student loan minimum payments as low as possible so you can knock out the credit card debt first, since credit card interest is significantly higher. Plus, because the balance is fairly low, it’s a “win” you can achieve quickly.

To lower your student loan minimums, start by applying for an income-driven repayment plan at StudentLoans.gov. These plans will cap your monthly payments at 10% to 20% of your discretionary income — but they only apply to your federal loans. They stretch out your monthly payments over 20 or 25 years, instead of the standard 10, and whatever balance you owe at the end will be forgiven.

A single person in the continental United States with your salary and a $50,000 federal loan balance at 5% interest could save nearly $350 on their monthly payment.

Of course, there are drawbacks: Obviously, these plans prolong the time you pay on debt, and you often pay more in interest as a result. You’ll also owe income tax on whatever amount is forgiven.

The goal here isn’t loan forgiveness — it’s to lower your monthly payment for now. You can always make extra payments or make more than the minimum.

Once you’ve gotten rid of your credit card balance, keep making minimum payments on your federal loans and focus on paying off your $30,000 in private student loans — not just because the interest is higher, but because you have a lot more protections and flexibility with federal loans. Apply whatever you were paying toward your credit card to your private loans.

Once the private loans are gone, start putting those payments toward your $50,000 in federal loans.

As for your other goals: Take advantage of any 401(k) match your new employer offers. Even if your company only matches 25% or 50%, that’s a 25% or 50% return on your investment. I’d also suggest setting up automatic transfers to build an emergency fund, even if you can only afford $50 or $100 a month.

Once you’re rid of your credit card debt and private student loans, you might want to readjust your priorities and start saving a little more, even if you’re still paying off your federal loans.

In general, the best advice for any recent grad, regardless of whether they have student loans, is to keep living on a student’s budget for as long as possible. That means keeping your cost of living low by splitting rent with roommates or living with family, avoiding a car payment and limiting meals out.

With the right strategy and budget, you will get rid of this debt — no time machine required.

Robin Hartill is a senior editor at The Penny Hoarder and the voice behind Dear Penny. Send your questions about student loans to AskPenny@thepennyhoarder.com.

ALSO IN THIS SECTION

  1. Michael Higgins, DO Vince Vanni
    News and notes on local businesses
  2. Regional Medical Center Bayonet Point Star Award Volunteers, from left: Rev. Fred Houck, Barbara Weber and Steve Johnson. Regional Medical Center Bayonet Point
    News and notes on Pasco County businesses
  3. A huge number of homes owned by Baby Boomers will sell in the next 20 years. How will the trend affect the Florida housing market? CAMERON GILLIE  |  NAPLES DAILY NEWS
    The enormous generation born between 1946 and 1964 owns about 40 percent of the homes across the country.
  4. Service dog Eleanor Rigby unexpectedly gave birth to eight puppies at Tampa International Airport as her human family was waiting near gate F81 to board a flight to Philadelphia in May 2018. The airport is getting ready to add pet-relief areas at its airsides for service dogs. (EMILY NIPPS | Tampa International Airport) Tampa International Airport
    Work on the new amenities is expected to be completed by next July.
  5. Developers of a proposed apartment complex near St. Petersburg's Mirror Lake area want to tear down this bungalow and replace it with a ramp to the parking garage. Susan Taylor Martin
    The only access would be via a narrow court lined with vintage houses.
  6. Cooling canals, with Turkey Point nuclear power plant in the background. Miami Herald
    The Nuclear Regulatory Commission on Thursday announced that it had signed off on Florida Power and Light’s latest application for a 20-year extension.
  7. Check tampabay.com for the latest breaking news and updates. Tampa Bay Times
    Wages rose a solid 3.1% in November compared with a year earlier.
  8. Noah Shaffer of Confidant Asset Management says the restaurant sector in the Tampa Bay area has done well in 2019 and to expect more openings in the coming months. Chick-fil-A Brandon South opened earlier this year.
    So far, the economy appears robust enough to support further expansion, says a local industry professional.
  9. A new retail center and health club are proposed for the Epperson neighborhood in Wesley Chapel, home of the Crystal Lagoon. Preliminary plans show the fitness club near the most eastern edge of the lagoon. SCOTT KEELER  |   Times
    Ryan Companies proposes grocery, retail stores and health club at neighborhood’s entrance
  10. Jamie Harden of Creative Sign Designs and Maryann Ferenc of Mise en Place discuss priorities for the Tampa Bay Chamber for the coming year. Harden is the outgoing chairman of the chamber. Ferenc is the incoming chairwoman. RICHARD DANIELSON | Times
    Leadership of the organization, formerly the Greater Tampa Chamber of Commerce, also says it could have handled its recent name change better.
Advertisement
Advertisement
Advertisement