Always Picking Between Car and Student Loan Payments? 7 Secrets to Managing Both
The resumption of student loan payments has taken a toll on many borrowers. There are 44 million Americans with student loan debt and the average monthly student loan payment is $503, according to the Education Data Initiative.
The average borrower takes 20 years to repay debt, so it’s no surprise that for many borrowers who also have car loans, it might come down to making hard choices about payments.
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“Student loan payments and car payments can be a major drain on your finances, especially if you’ve got a long time to go before your payment is complete,” said Scott Lieberman, founder of Touchdown Money. “But it’s still possible to budget while managing these monthly obligations, and it’s honestly a necessity to stay on a strong financial path.”
Here are some tips to be able to manage both, according to experts.
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Evaluate Your Interest Rates
Interest rates can differ widely, so it is crucial to compare.
For instance, car loan interest rates typically range from 5.64% to 21.55%, while student loan interest rates often fall between 6.53% and 9.08%, said Steve Sexton, CEO of Sexton Advisory Group.
“To minimize overall interest payments, prioritize paying off the higher interest rate debt first,” Sexton recommended.
So, for example, if your car loan has an interest rate of 9% and your student loans are at 7%, it would be more cost effective to allocate more funds toward paying down the car loan faster, he said.
He said, “This approach reduces the total amount of interest you pay over time, leading to significant savings.”
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Create a Budget and Stick to it
Managing car and student loan payments simultaneously can be overwhelming, but there are strategies that can help alleviate some of the stress, said Michael Collins, CFA, founder and CEO of WinCap Financial.
The best way to juggle these payments is by creating a budget and sticking to it, which starts with listing all of your income sources and expenses, including the payments for your loans, he said.
“Next, look for ways to cut back on unnecessary expenses and use that money to pay off your loans,” he said, adding that you could also consider refinancing your loans to potentially lower your monthly payment. “Even when paying off these loans, don’t forget about setting aside some savings for unexpected expenses or emergencies.”
Prioritize the Car Loan
Jack Wang, wealth advisor and college financial aid advisor at Innovative Advisory Group, recommends focusing on the car loan. His rationale: Car loans do not offer different repayment plans or potential for forgiveness or forbearance.
“Nor is there a potential for a tax deduction for loan interest, whereas student loan interest may be deductible,” he said.
Wang also added that one overlooked aspect of federal student loans is the ability to change repayment plans at any time, for any reason.
“A person could change the repayment to temporarily reduce payments to allow for more payments to go on the car loan,” he said. “Then change the repayment option back to the original, or simply make extra payments once the car loan is paid off.”
Look Into Income-Driven Repayment Plans
If applicable, consider enrolling in an income-driven repayment (IDR) plan for federal student loans.
“These plans adjust monthly payments based on your income, which can provide more flexibility to manage other financial obligations like car payments,” said Taylor Kovar, CFP, founder and CEO at 11 Financial.
For instance, the SAVE plan — rolled out by the Biden administration — provides the lowest monthly payments of any IDR plan available to nearly all student borrowers and replaces the Revised Pay-As-You-Earn (REPAYE) plan.
Automate Payments
Setting up automatic payments for both your car and student loans is a great strategy, as it not only ensures timely payments but also helps you avoid late fees and potential damage to your credit score, Sexton said.
In fact, he added that many lenders offer a small interest rate reduction, often around 0.25%, for enrolling in autopay.
“This reduction can save you money over the life of the loan, making it a smart financial move,” Sexton said. “Automating your payments not only provides peace of mind but also contributes to maintaining a good credit history, which is beneficial for future financial endeavors.”
Tax Deduction Strategies
Another important factor is the importance of taking full advantage of available tax deductions to reduce your overall tax burden.
“Interest paid on student loans, for example, can often be deducted from your taxable income, with a typical maximum deduction of $2,500 depending on your income and filing status,” according to Sexton, who noted that, while student loan interest is commonly deductible, you may also find deductions for other types of loan interest.
In turn, he said using the tax savings from these deductions to make extra payments on your car loan or other high-interest debt can accelerate your payoff process and further decrease the total interest you pay, enhancing your financial stability.
Contact Your Car Loan Servicer
If you think you may miss a payment, contact the lender before your payment is due, as they may be willing to work with you on a payment plan or refinancing, according to Kyle Enright, president of Achieve.
“Beware, though, that while payments could be lower, it might also mean a longer term,” Enright said. “And refinancing can be expensive.”
Alternatively, he said, find out from your lender just how much you owe on the car.
“Do your homework, and if you can sell the car for more than what’s left on your loan, that might be a good option,” Enright added. “You’d be able to pay off the bank, maintain your credit profile and hopefully have enough cash to purchase a less-expensive car.”
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This article originally appeared on GOBankingRates.com: Always Picking Between Car and Student Loan Payments? 7 Secrets to Managing Both