Life after Student Loan Debt

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By Jennifer Calonia

January 30, 2019

With the cost of college increasing every year, more students and parents are leaving higher education with ballooning student loan debt. If you’ve finally gotten out from under the weight of your student loans or your child’s student debt, you might be wondering what’s next?

The average monthly student loan payment is hundreds of dollars, which means you now have significant wiggle room in your budget. Instead of letting that money sit in your checking account, here are a few ways to put that available cash to good use.   

Pay Down Other High-Interest Debt

You might’ve cleared out your student loan balance after years of effort, but don’t let the momentum stop there. If you have other debt, such as credit card debt, auto loans or personal loans, use the debt avalanche method to strategically tackle it.

The debt avalanche method involves prioritizing debt repayment based on the loan with the highest interest rate first, so you’re saving more money on interest overall. To put this into practice, funnel all extra funds toward your highest-rate debt and pay only the required monthly payment on all other debts. Once the high-interest debt is fully repaid, move onto the loan with the next highest interest rate, and so on.

Build an Emergency Fund

Although it’s a huge accomplishment to be debt-free, all of that hard work will be for nothing if a costly emergency comes up and you’re unprepared.

Ideally, you should already have an emergency fund before trying to accelerate loan repayment. But, if you don’t, start saving a rainy day fund for emergencies and unforeseeable expenses. Your goal should be to have about 6 months of emergency savings to sustain your monthly expenses in the event of a sudden medical bill, unexpected home repair or unemployment.

A good approach is to build an emergency fund by automating your savings. Allocate a specific amount of money from each paycheck for savings and set up an automatic transfer to a dedicated emergency savings account.

If you don’t have an emergency fund, you might have to skip one of your bills in the event of an emergency. Other debts aren’t as forgiving as student loans and don’t provide deferments, forbearances and income-driven repayment plans.

Increase Retirement Savings

As parents, you might have sacrificed your own retirement security to support your child’s education. Now that your student loan obligations have ended, the next step is restoring your retirement savings and making up for lost time.

Put extra funds toward your 401(k) retirement account and max out your contribution. This is especially fruitful if your employer matches contributions — free money is always a plus. If you don’t have an employer-sponsored retirement account, open an IRA or Roth IRA to ensure you’re not letting retirement savings opportunities slip away. If you are age 50 or older, take advantage of the catch-up contributions, which increase the annual contribution limits by $1,000.

Plan Your Next Child’s College Fund

If you have younger children lining up to go to college, it’s time to get proactive about saving toward their college savings fund so you don’t find yourself buried in debt all over again.

Benchmark your progress in saving for their college educations. Multiply each child’s age by $3,000 for an in-state public 4-year college, $5,000 for an out-of-state public 4-year college and $7,000 for a private 4-year college. If your savings fall short, increase the amount you save each month by enough to eliminate the shortfall by the time the child enrolls in college.

You’ll then have enough to cover about a third of their future college costs. If you want to reduce their student loan debt further, save more. College savings are the antidote to student loan debt.

Treat Yourself!

Last, but not least, don’t forget to celebrate this enormous win. You’ve worked hard to rid yourself of student loan debt and you deserve a reward for your commitment and effort.

Just don’t go to an extreme with the celebration, since there’s a tendency for spending to increase to consume all available income. Continue managing your money responsibly.

Whatever you decide to do next, life after student loans can be planned strategically and yes — it can also be fun.

A good place to start:

See the best 529 plans, personalized for you