by Repayable | Apr 17, 2017 | #Millenniallife, Getting started, Money Matters
Read this article if you know your total debt load and want to figure out how bad it actually is.
Estimated read time ~ 9 minutes.
By now you’ve figured out how much you owe, what type of loans you have, and what repayment plan you’re in. Now it’s time to assess your financial situation. You have to draw conclusions about the impact your student loans have on your finances in order to set goals that meet your unique needs.
So how do you know if your student loan debt sucks hard or just sucks a little? The answer is the debt to income (debt:income) ratio. This handy little ratio helps quantify your debt load relative to your income. Think of it this way, $40,000 feels different if you make $28,000 per year than if you make $100,000 per year.
A side note that the debt:income ratio I talk about is not the same as the debt:income ratio creditors use to determine your financial viability. This ratio focuses on total student loan debt load and annual income. The common debt:income ratio focuses on monthly debt payments and monthly income and is reported as a percentage.
How to calculate your debt:income ratio.
- Grab your total debt: we’ll use $40,000 for this example.
- Estimate your total annual income: we’ll use $28,000 for this example.
- Divide your debt by your annual income: $40,000 ➗ 28,000
- Your quotient is your debt:income: in this case it’s about 1.4
What does your debt:income ratio mean?
Your debt:income gives you a quick way to assess the affordability of your debt. In general the higher your debt:income the harder it feels to repay your debt. As you make more money it feels easier to repay your debt with the same or even higher debt:income.
For example if your student loan debt is $150,000 and you make $100,000 per year it’s easier to make your payments than if you have a debt total of $45,000 and make $30,000 per year. Why is this the case? Essentially the more money you make, the more you have left after paying for basic costs of living. You may elect to pay for a higher quality of life as you make more but there’s less financial pressure on the basics like groceries, transportation, and health insurance.
What’s a good debt:income ratio?
The answer is, it depends on how much you make. If your ratio is less than 1:1 it will likely feel affordable. However if you make a salary that’s high enough to cover cost of living and then some a ratio of 1.5:1 may feel affordable. Generally, I would aim to cap your debt:income ratio at 1.5:1.
What to do with your debt:income ratio.
So what do you do if your debt:income ratio just isn’t that great? Well, there are only two sides to this equation, your debt and your income. The only thing you can do with your debt once you’ve borrowed it is repay it. The flexible side of this equation is your income.
There are a ton of resources out there on ways to make extra money. You can try to move to a better paying position in your company, switch to a better paying field (that doesn’t require more education and debt), ask for a raise, or start a side hustle. There are a lot of resources out there for making any of these moves. I’ll link up my favorite side hustle podcast at the end of this post.
What did your debt:income ratio reveal to you? Did it bring up more questions than answers? I would love to hear your thoughts on the Repayable Facebook Page or in the comments below. As always you can send an email to me jeni@repayable.org.
Additional Resources
Side Hustle School Podcast
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by Repayable | Apr 3, 2017 | Getting started
Read this if you want to know if you’re in the best repayment plan for your specific financial situation. Estimated read time ~5 minutes.
Repayment plans are the start of your student loan repayment journey. The right plan keeps you from worrying you won’t be able to make your monthly payment and sets an end date for student loan freedom. The wrong plan has you financially stretched or paying more slowly than you could be.
This article will give you the key tenants of choosing a repayment plan so you can customize your repayment to fit your financial needs. If your plan’s not doing it for you anymore it’s time to say buh-bye!
Duration of Repayment
How long will it take you to repay your loans according to this plan with no missed or extra payments? The plan you choose determines when you’re debt free. If you want to be out of student loan debt in 10 years look at the standard 10 year repayment plan.
Cost of Monthly Payment Relative to Your Income
Repayment plans offer either a fixed monthly amount with a set duration or a variable amount that gets re-calculated with changes in your income. The income-based repayment plans offer the most flexibility in terms of your payment relative to your income. However a standard 10 year plan offers a clearly defined timeline for repayment.
Your financial situation will determine which option is best for you at the time. For example maybe you would like to be out of debt in 10 years but the monthly payment under the 10 year repayment plan is unaffordable right now on your starter salary. You can always choose an income-based plan first and change to a more aggressive repayment plan as your income allows.
Loan Forgiveness Options
Are payments made under this repayment plan eligible for loan forgiveness? This is a critical piece of information to know if you’re considering loan forgiveness of any type. If you’re working toward loan forgiveness such as PSLF you’re required to make 120 payments on an eligible income-based repayment plan. If you change plans or consolidate your loans you could have to restart your 120 payments from the beginning and lose all the progress you made so far.
Advantages and Disadvantages of the Repayment Plan
What are the advantages and disadvantages of your repayment plan? Standard repayment plans minimize the amount you pay in interest and help you repay your loans more quickly but have high monthly payments that don’t take your income into account so may be unaffordable for some borrowers. Income-based plans have low monthly payments but stretch out the time it takes to repay your loans which means you pay more interest and it will take you longer to become debt free.
Target Borrower for the Repayment Plan
Who is the ideal candidate for your repayment plan? Some plans work very well for high-income borrowers and less well for lower-income borrowers. For example, an income-based repayment plan may not be the best choice for a high-income borrower who would rather have a set monthly payment and repay their debt over 10 years. In contrast an income-based plan might be a great option for someone in a starter job not making their goal salary yet. You’ll need to compare your financial situation to the target borrower for the plan and decide if the plan makes sense for you.
Choosing the right repayment plan involves deciding your specific loan repayment goals and finding the plan that can make those goals come to life. All federal loan repayment plans can be changed at any time by contacting your loan servicer. If you’re not in the right repayment plan, break up with it for a better one, you won’t even need to burn all of it’s old things 🙂
After reading this post are you planning to kick your plan to the curb for something better or are you and your plan meant to be? Let me know in the comments below or on the Repayable Facebook Page. As always you can send me an email jeni@repayable.org or post your question in the Facebook group and I will help you navigate the minutia of plan choice.
Additional Resources
Repayable: Chapter 3 Ways to Repay
Federal Student Aid Overview of Repayment Plans
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