You’ve graduated college. You’ve landed a pretty good first-post-college job paying $50,000 a year (the average starting salary for the class of 2015). You’re feeling pretty great. You have some great plans for trips with friends, hitting your favorite concert venues, buying a new car, etc. Real life is now beginning and you’re truly excited!
And then you sit down and figure out how much you’ll have to spend to start paying off student loans six months after graduation.
Available Cash Beyond Paying Off Student Loans
Let’s say your total loan amount is the average for people who earned a baccalaureate degree in 2015: a bit more than $35,000. How much of your pretty-good gross salary will you have to pay toward student loans each month? Using a calculator provided by Adventures In Education on a 10-year loan at 6.8 percent, your monthly payment comes to $402.78. (Very important note: we’re not differentiating here on whether your loans are federal, private or a combination of the two and if they have different loan periods and interest rates. This is a general example of a monthly payment amount.)
A bit more than $400 a month sounds reasonable, doesn’t it? But let’s take a look at your expenses.
You’re $50K gross annual salary translates to a monthly gross salary of a few pennies more than $4,166. Your gross salary puts you in the 25 percent tax bracket (we’re assuming you’re single), which means your net yearly income (after taxes) puts you at a gross of $37,500 or $3,125 net per month. (This is federal taxes only. You also may have to pay state taxes.)
Now let’s look at your expenses. The average worker in the U.S. pays a monthly health insurance premium of $89 (you may pay less because of your youth). We’re going to assume you went out and bought a car (a used one). The average monthly loan payment (in 2014) on used cars was $352.
We’re going to assume you took an apartment with a roommate and you’re splitting rent and utilities right down the middle. The median rent for a two-bedroom apartment in the U.S. is $1,300. Most of your utilities (water, gas, sewage, trash, and electric) are paid within the monthly rent check. At least one or two utility bills usually are your responsibility, but we’ll assume for our purposes here that you have a very generous landlord who includes all utilities. So, rent is $1,300 split between you and your roommate. Your monthly rent bill therefore comes to $650.
Take your net monthly income of $3,125 and subtract your rent bill, health insurance premium, car loan, and cost for paying off student loans and your monthly net now is $2,034.
But wait. You still need to pay car insurance, buy gas for the car, pay for car repairs and maintenance, buy groceries, pay your cell phone bill, etc. Now we’re talking expenses of probably $800-$1,000 leaving you with a net of just about $1,000 before calculating paying off student loans. After a $400 student loan payment, you’re down to just $600. And we haven’t even talked about building up your savings account, going out with friends, buying clothes, taking trips, going to concerts, hitting the club scene, going to sporting events, and so on.
So we’ll take $600 (that net after all expenses you must pay every month) and divide it by 30 days in a month. You have about $20 a day left for fun. The things that make life worth living: spending time with people you love/enjoy and experiencing new things.
And remember: all these calculations assume you’re making $50K gross a year and that you have $35,000 in student loans! You may be making less. You may have more student loan debt. You also may have decided you need to live alone, buy a brand new sports car, etc.
What if you made only $35K gross and you have $60,000 in loans? Taking the calculations above, you’d have a monthly net of just $2,480 (you’re in a lower tax bracket of only 15 percent with a gross of $35,000). Your monthly loan payment (on $60K) is now $690. Subtract your loan payment from your monthly net and you’re left with $1,790. After paying your rent, car payment, and health insurance premium, you’re left with $699 to pay for groceries, car insurance, your cell phone bill, etc. Sure, you can live at home with your folks, but who wants to do that?
Where’s the money for fun? Are you trapped in a cycle of working just to pay student loans and monthly obligations? Where’s the money for living!?
There Is Hope for Paying Off Student Loans: Income-Based Repayments
Income-based repayment plans (IBRs) are just what they sound like: you pay off federal student loans based on your income. They can help keep your student loan payments affordable based on your income and family size. They are, however, available only for federal student loan borrowers who took out either Direct or FFEL loans.
The process of applying for an IBR can be complicated and time consuming. We can help you reduce your monthly loan payments based on your income.
Your 20’s are the time to ENJOY your life, not worry about loan payments. Contact New Start Advisors today so that we can help you put some joie de vivre back into your life!