SHOULD I PAY OFF STUDENT LOANS BEFORE SAVING?

Wondering whether you should pay off student loans before saving? I wondered the same thing when I started my journey of aggressively paying off $650k of student loans. While everyone’s situation is different, I think for the most part, you should save up some money before paying off student loans. Here’s why.

Should I pay off student loans before saving?

First, I’m going to assume that you don’t have any credit card debt if you are currently deciding whether to pay off student loans before saving. If you do have credit card debt, focus on eliminating that debt before you start chipping away extra on your student loans. Your credit card debt will be accruing far more interest than your student loans will, as credit cards almost always have higher interest rates than student loans. You should focus on paying off any loans that have a higher interest rate than your student loans before aggressively paying off student loans.

If you don’t have credit card debt or other debt that has a higher interest rate than your student loans, then, you should save up at least one month of expenses before aggressively paying off your student loans in case of an emergency. My cute friend is a stay at home mom who is head over heels for her engineer husband and two little boys. She and her husband earned their masters degrees (with kids in tow!) and did what a lot of student loan borrowers do. They took decent jobs in good communities and bought their first house. Things were going well for them financially and they decided to start making extra student loan payments, despite the fact that they literally had no savings. They figured if they could pay off debt quickly, that would enable them to start saving money as soon as their debt was repaid. Within a year, her husband lost his job and they were stuck with a fat mortgage and some hefty student loan payments, and no income to make those payments. And you can guess what I’m going to say next. That is exactly why you should have a little money saved up before you start aggressively paying off your student loans. You never know what situations are going to arise. And trust me when I say, at least one situation will arise where you are going to need some savings and it’s a good idea to be prepared.

Remember that once you make a student loan payment, that money is gone forever. You can’t get it back, not even when there is an emergency and not even if it was an extra payment. At the end of the day, the bank is going to get paid no matter what so long as you are making your minimum payments. So, you don’t need to worry about that. What you DO need to worry about is protecting yourself and your family in case of an emergency.

How much should I save before paying off my student loans? 

I recommend saving one month of living expenses before making aggressive student loan payments. I have never had an emergency that has cost me less than $1000. A couple of summers ago, we had to replace our entire HVAC. We got an amazing deal, and it still cost close to $8,000. Last year, we had a medical emergency that cost $3000. This year, we’ve had unexpected expenses that are hovering around $10,000 so far. So any time anyone suggests saving anything less than a month of expenses ($1000 is a popular number) before making aggressive payments, I bite my knuckles a little. Maybe I’m just more unlucky with emergency expenses, but for me, that wouldn’t come close to being enough. [Related: How to Recover From a Financial Setback]

In addition to saving one month of living expenses before diving into those student loans, I also recommend continuing to save money even while you’re making aggressive payments. Start with saving 5% of your income, and as your debt balance goes down, increase it to 10%. We currently have 3 months of living expenses in savings and we continue to save 10% of our income before putting any extra money towards our student loans. While yes, we could technically pay off our student loans even faster if we didn’t put anything towards savings, we want to be prepared in case of an emergency.

I once had a friend, a doctor, tell me that he wasn’t going to save any money before making aggressive student loan payments because he had a high paying job and he could easily pay for an emergency as it arises, rather than making an aggressive student loan payment that month. I certainly understand his point of view, however, he assumed that just because he was a doctor, he had earning potential. What if he lost his job? What if he was in a specialty that became obsolete? What if he later decided that he absolutely hated being a doctor? What if he had a baby and wanted to become a stay at home parent? Having a safety net is just that—it makes sure you are safe. None of us have a crystal ball. We can’t predict the future. We might get really lucky and not have anything bad happen to us while we are paying off debt. But it will certainly give you peace of mind on your journey knowing that you have a little bit of a safety net.

What do I do when I’m finished repaying my student loans/other debt? 

After you have one month of expenses saved, you’ve paid off your high interest debt and student loans, you can move on to saving more money, and more importantly, enjoying your life more and keeping yourself out of debt.

There you have it! Make sure you have a little bit of savings (at least one month’s worth of expenses) before you start diving into aggressively paying off your student loans. Here’s a quick recap.

RECAP:

1. First, make sure you can meet the minimum payments for all debt owed (not to mention your regular monthly bills). If not, work at decreasing expenses and increase income.
2. Then, start saving. Save one month’s of expenses before moving on to aggressively paying off debt.
3. After you have a month’s worth of expenses, prioritize your debt in order or highest earning interest first. If you have credit cards or other debt that has higher interest than your student loans, pay those first, THEN move on to paying off your student loans.
4. Continue to save 5-10% of your income while you are paying off debt.
5. Once your debt is repaid, increase your savings and enjoy your life more. 🙂

Are you saving money before you pay off your student loans? Why or why not? 

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Here at Deeply in Debt, we offer tons of personal finance advice based on our own journey paying off $650k of student loan debt. If you have student loan debt and aren’t sure where to start or what to do, I highly recommend the CFA’s over at Student Loan Planner to help you put together a solid financial plan for your student loan debt. We personally used them and it literally saved us over $200,000 on our student loans. You can check out the Student Loan Planner here.