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Thursday, December 7, 2023

An HR Generalist Making $90k In Minneapolis Wants To Pay Off Student Loans

How I Money is a series featuring real people who have real questions about money, and real advice from Betterment’s experts. Follow along as our financial planners help folks just like you think through saving, investing, debt, retirement, and more.

Meet Lilliana*:

A module showing a person's characteristics. "Gender: Woman" "Age: 24" "Location: Minneapolis, MN" "Profession: HR Generalist" "Married: No" "Children: No" "Household income: $90k" "Debt: $100-200k" "Assets: $10-50k" "monthly expenses: $3-5k"

Let’s dive into Lilliana’s financial goals and concerns:

Talk me through your short-term financial goals. What do you hope to achieve within the next 5 years?

Lilliana: Making progress on paying down undergrad and graduate student debt. Paying off a car.

Let’s talk long-term. What do you hope to accomplish financially 5 years or more from now?

Lilliana: Continuing to pay off student loans hopefully before the 15-year repayment period!

Three images, from left to right: A purple car, underneath reads "pay off car." A green book with a black bookmark, underneath reads "pay off student loans." A blue and white tilted umbrella, underneath reads "prepare for retirement"

What impact has COVID-19 had on either your short or long-term financial goals?

Lilliana: COVID impacted the start date of my post-graduation job, which restricted my ability to begin refinancing and beginning to pay my student loans until I could start this job roughly six months later—all while my private loans continued to accrue interest. This impacted both my short and long-term goals as paying down the immense student loan debt is my current top priority.

If you could ask a financial expert for advice on one money question, what would it be?

Lilliana: How should someone plan to start contributing for their retirement when they are unable to comfortably afford to do so in the present moment?

What the financial experts say:

On the left is a photograph of a white woman in front of a blue background. She's smiling, wearing a black shirt and, and has brown/blond hair. On the right is a caption that reads: "Meet Corbin. Corbin is a certified Financial planner who works directly with Betterment customers to help them achieve their financial goals.

We asked Corbin to comment on Lilliana’s financial goals. Here are her thoughts.

Like many young people, Lilliana has a large amount of student loan debt. How much of her income should she be using to pay student loans?

Corbin: I’m so glad to see that Lilliana has a full-time role after graduation, especially since many graduates have struggled this year to find work. Given both her relatively high income compared to the average college graduate and her stated priority of paying off her student loans, Lilliana can be aggressive with her payment plan.

There is no set amount of income that Lilliana should contribute, but before coming up with a repayment plan for her debt, Lilliana needs to make sure that she is making all minimum debt payments on time. This will allow her to avoid racking up fees and help her build her credit score.

After that, how much she contributes towards her student loans depends on how much cash she has on hand after paying all of her living expenses.

A module that has a purple background with a green book on the right, and the left reads "What are you saving for? Saying goodbye to student loans" and "How should you do it? 1. start with the highest interest rate and 2. Consider consolidating loans."

Given that aid to federal loans will end eventually, Lilliana should do the following:

Pay off debt with the highest interest first. People tend to think that paying off the loan with the highest balance is best, but the reality is that loans with higher interest rates are more costly over time. At Betterment, we consider any debt above 5% interest or finance charge fees to be high-cost debt. Others may use a higher number (like 8%), but we tend to take a more conservative view here.

Since Lilliana also mentioned having both federal and private student loans, consolidating and/or refinancing may be in her best interest. While there are differences within these two options, the overall benefit is being able to make one monthly payment instead of individual payments to each loan provider. With private loan refinancing, she may even be able to reduce her interest rate and change her repayment schedule.

Once Lilliana knows her new minimum payments, she can choose to pay more towards the highest interest loan or maintain the minimum payments depending on her other competing financial goals, like building an emergency fund or retirement.

Prep for your financial future

A text box that reads "Our CFP(R) Professional's Recommendation: Pay off debt with the highest interest first and focus on meeting minimum payments"

How should Lilliana plan to save for retirement in the future?

Corbin: The most important factor Lilliana has on her side is time. Regular investments made right from an early age can reap huge benefits at the time of retirement, because of money’s time value and compound interest. 

Because of this, I’d strongly recommend that once Lilliana gets to a manageable place with her loans and builds a three month safety net, she begin investing for retirement.

First, Lilliana should calculate how much she needs to save. To get this number, she needs to consider factors like when she wants to retire, her possible future Social Security benefits, inflation, taxes, and estimated investment returns.

Then, Lilliana needs to figure out what accounts benefit her the most based on the factors above, like a 401(k) or IRA, Roth or Traditional account, HSA, and/or taxable investment account, to name a few.

Finally, if her employer offers a match as part of her retirement plan, she should contribute enough to get the full benefit. Take advantage of this money, since not every employer is nice enough to offer one!

This is the one caveat to the high interest debt pay off recommendation. Since an employer match provides “free money”, you should prioritize maxing this match if one is available over making additional payments to your high interest loans.

If all of this sounds overwhelming, that’s totally understandable—but there are services out there that can help with just this scenario. For example, Betterment has a retirement planning tool that helps tell our customers how much they need to save for a comfortable retirement. We take into account when and where they plan on retiring, as well as their current and anticipated income.

Ultimately, Lilliana will have to make investing for retirement a priority and be careful not to sacrifice her debt repayment plan through spending that can restart the debt cycle.

A text box that reads "Our CFP(R) Professional's Recommendation: Calculate how much to save for retirement using a financial product like Betterment"

Are there other financial goals Lilliana should start thinking along with tackling her debt?

Corbin: We always recommend building an emergency fund as one of the pinnacles of financial security. That’s because an emergency fund can help you pay for unexpected expenses that you otherwise aren’t able to afford, or that even force you to take on more debt. An emergency fund can also provide some peace of mind, especially during this tumultuous period of job loss for many folks.

We recommend saving three to six months of living expenses, including your monthly housing payments, bill payments, utilities, groceries, and other recurring monthly bills.

If Lilliana is able to repay her high interest student loans, build an emergency fund, get on track for retirement, and still have extra cash to put towards other goals, I recommend focusing on her next highest priority such as paying off her car. Whether that means increasing her monthly loan payments or paying off a loan early entirely, she should keep in mind that lenders are not always inclined to help with the latter, because of the potential income they might lose.

A text box that reads "Our CFP(R) Professional's Recommendation: Build an emergency fund of 3-6 months' worth of expenses"

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* Responses for the How I Money series were gathered through voluntary participation in an online survey where participants were requested to provide comments, feedback, ideas, reports, suggestions, data or other information to Betterment (collectively “Feedback”). The Feedback gathered in that survey excluded Betterment clients, was anonymized, and was used internally to help us understand how people could benefit from Betterment’s services and to create content to address those needs. Participants permitted Betterment to use any Feedback they provided for these purposes. While this content is written for advice purposes, it may not be applicable to all and is intended to be informational only.

Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

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