Five tips for balancing student loans and big-ticket purchases
By John Egan | October 31, 2016
You’ve got your eye on a new car, but your eyes are wide open when it comes to your mountain of student loan debt. If you’re stuck in that situation, you’ve got a lot of sympathizers.
A recent survey by Experian, one of the three major credit-reporting bureaus, found that 70 percent of Americans saddled with student loan debt say that debt has hindered their ability to save money for big purchases, like a car or a house.
“If you’re trying to save up for a major purchase and stay current on student loan payments, you really have no choice but to make sacrifices in terms of lifestyle and free time,” says Katie Ross, education and development manager at American Consumer Credit Counseling. “Luckily, with a goal in mind like buying a house or car, there’s a true incentive that serves as a light at the end of the tunnel.”
So, what can you do if you’re seeking to strike a balance between paying off student loan debt and setting aside money for a pricey item? What follows are five tips.
1. Create a Budget.
Ross suggests establishing a budget to ensure you’re covering your monthly bills — including your student loan debt — while trying to squirrel away money for the big purchase.
“If you’ve already established a budget, go over it thoroughly and examine which nonessential expenses account for the most spending,” Ross says. “Cutting a little bit from a few different expenses creates noticeable savings each month.”
2. Pick the Right Loan Repayment Plan.
A standard plan for repaying federal student loans spreads payments over a 10-year period, Ross says, but you might want to look into other options.
For instance, the extended repayment plan spreads loan payments over 25 years, so monthly payments would decrease and allow you to save more money for a large purchase, she says. Also, a graduated repayment plan lets you start with a smaller monthly payment and step up the dollar amount every two years. Under the graduated plan, you’ll still pay off the loan in 10 years, but it’ll take less of a bite out of your budget at the outset, according to Ross.
Another option: plans that base your monthly student loan payments on your income. “These plans usually leave plenty of room in your budget for putting aside savings,” Ross says.
3. Cut Unnecessary Costs.
“This one is tough because it requires you to forego things that are enjoyable,” Ross says, “but it’s really a necessary and easy way to generate savings if you have a major purchase in mind.”
This step could include cutting back on movies or concerts, ditching your cable TV subscription or dialing back your cellphone plan, Ross says. However, the best way to slash this type of spending is to limit the number of trips to bars and restaurants, she says.
“Restaurants and bars mark up the cost of meals and cocktails more than almost anything else consumers buy. You’re really paying for the experience and the service,” Ross says.
Fixing meals and pouring cocktails at home will make it easier to put money toward that big-ticket purchase, she says.
4. Boost Your Income.
Taking a second job, a part-time or even full-time one, will add to your savings quicker than virtually any other alternative. However, as Ross points out, it “can be physically and emotionally draining.”
A compromise could be snagging a temporary seasonal job at a retailer like Macy’s or Walmart, or a delivery service like Federal Express or UPS.
If a second job doesn’t appeal to you, then you might consider turning your hobby or craft into cash by selling handmade purses, for instance, on websites like Craigslist and Etsy. Or if you grow fruits and vegetables in your home garden, you can score extra cash by hawking them at local farmers markets.
5. Set Priorities.
If you’re coping with credit card debt, focus on paying that off before any other debt, as interest rates for credit cards are far higher than those for student loans, says Brian Davis, personal finance blogger at SparkRental.com. Once higher-interest debt is erased, then carve out $1,000 or so for an emergency fund, he suggests.
As you’re building the emergency fund, go over your financial priorities, Davis recommends. For some people, stashing cash in retirement accounts might be the highest priority; for others, it could be buying a house.
“It’s worth noting that buying a home doesn’t always make financial sense. It makes the most sense for people whose lives are extremely stable and predictable,” Davis says.
He adds: “The old rule of thumb is that if you don’t plan to own a home for at least seven years, you should rent, because it takes years to recover the up-front costs of buying a home.”