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Could Your Student Loans Be the Key to Building Your Emergency Savings?

Student looking at computer at student loan debt

It’s not hard to believe that people who have managed to set aside money in case of emergencies enjoy a greater sense of “financial wellbeing.”  Freedom from worrying about the “what ifs” and a sense of pride in achieving a monetary goal would make anyone feel good.

In reality, however, barely half of Americans have an extra $400 at their disposal in the event of an unexpected expense. In fact, 30% of people report finding it difficult just to get by in one Federal Reserve survey. While debt isn’t all to blame, when we factor in the fact that the average U.S. household carries more than $15,000 in credit card debt, it’s clear that many Americans are sending monthly payments to credit card companies instead of to their own savings.

What’s more, an increasing number of Americans (44.2 million and counting) are sending monthly payments to their student loan servicers. In 2016, college students graduated with an average student loan debt of almost $40,000. It may be known as “good debt” due to the long-term financial benefits of a college education, but in the short run, student debt is one more thing getting in the way of our savings.

Here’s the good news

Chances are, if you have been making automatic student loan payments, you’ve developed a good financial habit. That’s because some of the money you earn each month comes into your account…and goes straight out. You may not like it, but you are used to living without that money.

If only you could reduce the amount of money you send to your lender each month and instead automatically transfer the difference into a savings account.

Maybe you can.

Look into student loan forgiveness

If you have federal student loans, you may qualify for a program that will allow for the remaining balance of your student loan debt to be forgiven after a certain number of qualifying monthly payments.

If you work for the military or as a teacher you may already be aware programs that forgive some or all of your student loans. Likewise, assistance exists for lawyers, nurses, pharmacists, and doctors and dentists who work in certain areas. Other opportunities, such as the Public Service Loan Forgiveness (PSLF) Program, offer loan forgiveness to employees in local, state, or federal government or who work for certain a not-for-profit organizations.

With all of these programs, however, you must submit the necessary paperwork before your payments begin to qualify toward forgiveness. Don’t put it off. Contact your student loan servicer to get the conversation started.

Look into repayment plans

If you have been dutifully making your monthly student loan repayments for close to 2 decades, you might also consider talking with your lender to see if you qualify for a new student loan repayment plan. You may be able to make lower payments each month until you reach the 20- or 25-year mark (depending upon your loan terms), after which your remaining balance will be forgiven.

Keep in mind, however, that reducing your monthly payment amount via an Income-Driven Repayment (IDR) is helpful only if you are close to reaching the end of the term of your loans. Otherwise, you will simply take longer to pay off your student loans. The greater amount of interest you pay in the long run likely isn’t worth the savings you will put away in the short run.

Stay automated

If you have found a way to decrease your monthly student loan repayments, congratulations! However, you are only halfway there.

Because it can be tempting to have that extra cash around, set up a new automated process that deposits the difference into a hard-to-reach savings account right away. Remember, you have lived without that extra cash up until now. You’ll never know the difference—except for that growing sense of financial wellbeing you’re about to enjoy.