Ways Borrowers Can Pay Off Student Loans When They Earn More Than $100k
Following on from our previous blog post (Ways To Pay Off Your Student Loan When You Earn Less Than $50k), what are the options for borrowers at the other end of the scale?
People earning above $100K may be in a better position to repay their student loans without relying on forgiveness programs or IDR plans, although Payitoff’s tools provide actionable debt guidance solutions to guide borrowers.
If you are earning a relatively higher income, you might want to consider a more aggressive repayment strategy.
However, this is not a “one size fits all” recommendation. A borrowers’ decision should also consider the borrowers total debt amount, interest rates, and personal financial goals.
Let’s take a look at few ways borrowers can pay off student debt if they earn more than $100k:
Aggressive Repayment Strategies: With a higher income, allocating extra payments towards student loan principal can significantly reduce interest paid over the life of your loan. For example, on a $60,000 student loan at 6% interest, paying an extra $200 per month can save approximately $11,000 in interest and pay off the loan 5 years earlier.
Benefits:
Interest Savings: Paying off loans faster can significantly reduce the amount of interest paid over the life of the loan.
Debt-Free Sooner: Accelerating payments can lead to being debt-free faster, freeing up income for other financial goals.
Drawbacks:
Less Cash Flow: Higher monthly payments can reduce monthly cash flow, limiting funds available for other expenses or savings.
Potential for Burnout: Aggressively paying down debt can be financially and emotionally taxing, leading to burnout.
Maximizing Retirement Contributions: Balancing loan payments with retirement savings is vital. For example, contributing to a 401(k) up to the employer's match takes full advantage of the additional contributions your employer provides and reduces your taxable income, offering a dual financial benefit. The Secure Act 2.0 also introduced retirement matching for student loan payments, so if you make student loan payments, your employer may make matching contributions in your retirement accounts.
Benefits:
Tax Advantages: Contributions to retirement accounts like a 401(k) or a tax-deductible IRA may reduce taxable income, leading to immediate tax savings.
Compound Growth: Investing in retirement accounts allows for compound growth, potentially increasing wealth over time.
Employer Match: This not only helps your retirement savings grow faster but also effectively increases your total compensation without any extra effort on your part.
Drawbacks:
Reduced Liquidity: Money invested in retirement accounts is not easily accessible without penalties until retirement age.
Balancing Priorities: Allocating money towards retirement savings may slow down debt repayment efforts, prolonging the debt burden.
