If you’re still making payments to an education loan lender every month, you’re not alone. According to a study by NerdWallet, an online personal finance company, the average U.S. household has $130,922 in debt–$48,172 of which is attributable to student loans. It’s a hefty burden to carry, and it’s smart to chip away at it by making more than the minimum payment whenever you can. However, before you dedicate all of your disposable income to speeding up your education loan repayment, make sure you’ve done these three things.
- Set aside savings for emergencies. Commonly known as an emergency fund, this stockpile of savings will keep you afloat should you ever fall upon hard times as the result of a layoff, illness or injury, or unexpected home or automobile repair. Many experts recommend saving at least six months’ worth of living expenses—including mortgage or rent, credit card and loan payments, insurance premiums, food and other household necessities.
The caveat would be if you have private student loans with prohibitively high interest rates. In that case, it might be wiser to throw at least some of your extra money towards the balances. Talk to your financial advisor about your situation.
- Reduce your credit card debt. Remember that NerdWallet study we mentioned earlier? Well it found that the average American household has $15,762 in credit card debt. They’re also spending more than $2,500 on credit card interest each year. With the average APR on credit cards at 17 percent, it’s easy to see how this is possible.Federal student loans in 2016 usually require between 4 percent and 7 percent interest. Though the interest on private loans is generally higher, if they’re lower than the rate you’re paying on your credit card debt, it makes sense to postpone repayment until you’ve tackled those balances. Ask your financial advisor about the best strategy for doing this.
- Don’t neglect your retirement fund. You’ve saved for future emergencies and have paid off all your credit card balances. Now it’s time to put everything you have towards those burdensome student loans, right? Not so fast. Experts advise taking a look at your retirement savings first. If you haven’t saved enough—or anything at all—it’s important to focus on remedying that situation before attempting to pay off your student loans.
One recent survey found 56 percent
of Americans have saved less than $10,000 for retirement. One in three have failed to save a single dollar in a retirement account. Talk to your financial advisor about creating a retirement savings plan or maximizing your contributions. Strategies will vary based on your current savings, current and future earnings, age, retirement goals and risk tolerance.