Making financial decisions when you’re still paying off your student loans can be complicated. You might feel like you’re being pulled between two conflicting goals: paying down your loans and putting money into other financial priorities like purchasing a home or growing your retirement fund.
With thoughtful planning, it’s usually possible to balance these priorities in a way that lets you make progress toward your short- and long-term goals while also paying your student loans off as quickly as possible.
Here are three ways you might have to take your student loans into consideration during important financial milestones:
1: Home buying
When you’re shopping for a home, your first stop will usually be to a mortgage lender to figure out how much you’re qualified to borrow. One factor that influences how much home you can afford is your debt-to-income ratio, or DTI. Your DTI is simply your monthly income divided by your monthly debt payments, including student debt and any other payments you’re obligated to make, such as car loans, credit card payments, or child support. A lower DTI is more attractive to lenders because it means a better balance between debt and income, and thus more money you get to keep in your checking account.
Bigger monthly student loan payments increase your DTI, which may lower the size of the mortgage for which you can qualify and therefore limit the home size or neighborhood you can afford. For this reason, in order to lower your monthly student loan payments and decrease your DTI, it can sometimes make sense to switch to an Income-Driven Repayment Plan for federal loans if you qualify for this program. Or you may also decide to refinance your student loans, which can come with a lower interest rate and lower monthly payment.
Fortunately, when it comes to your credit score, having student loans can sometimes improve your chances of getting a mortgage and qualifying for a low interest rate. Consistently paying your student loans on time can improve your credit score and give mortgage lenders confidence in your ability to make your mortgage payments consistently.
2: Career Changes
Having to make student loan payments every month might mean more cautious choices if you’re thinking of switching jobs or changing career paths. You may have to rethink plans to start your own business, take a sabbatical, or work at a less stressful job if your payments mean that it’s not financially viable to take a pay cut or temporarily go without an income.
Fortunately, changing jobs can also be neutral or positive for your student loans. A less demanding job with a smaller salary doesn’t have to cause financial stress if it means you qualify for a smaller payment under an Income-Driven Repayment Plan, for example. In addition, some career paths, like nursing, can help you qualify for federal programs, such as Public Service Loan Forgiveness (PSLF), which can result in your loan balance being forgiven if you work in the government or nonprofit sector and meet the program requirements. And refinancing your student loans for a smaller monthly payment or a better interest rate might soften the blow of a smaller or more inconsistent salary.
3: Saving for Retirement
Student loan payments can put a dent in your monthly retirement savings, especially if your loan requires high payments or carries a high interest rate that affects how much of the balance you’re paying down with each payment. How much you prioritize your retirement compared to your student loan debt is a highly individualized decision.
Before you make that decision, you’ll want to compare the interest rates you’re paying on your student loans to the return you expect to see for your retirement savings. For some, it can make sense to prioritize retirement savings, especially if your company offers matching retirement contributions.
Beyond that, you may also want to factor in the psychological benefit of having paid off your student loans compared to that of having a nest egg. Some borrowers decide that they’ll sleep more soundly if they’re paying down loans quickly, while others elect to put as much as possible into retirement while making the minimum student loan payments.