I graduated with an MFA in 2008 and a loan balance of around $37,000 from my master’s and undergrad programs combined. For the next few years, my federal student loans were a constant source of stress. I felt like I wasn’t making any progress on them. I was on an income-based repayment plan and not even paying the full amount of interest due each month, and it felt like treading water financially.
In about 2015, I decided that it was time to face down my student loans. Instead of making the minimum payments each month, I made extra payments, following the debt snowball method. Finally, in the summer of 2018, all of my loans were paid off. I was completely debt-free.
My next thought was: Now what? You hear a lot about the drama of paying off student loans, of the planning and sacrifices it takes. You hear about people consolidating or refinancing their student loans to save on interest or get lower monthly payments, and about people who qualify or hope to qualify for student loan forgiveness because they work in public service. What you don’t hear a lot about is what people do once they pay off their loans.
Even student loan servicers are pretty nonchalant about that final debt payment. My last payment barely got an acknowledgment from the lender. I wasn’t expecting a party or a certificate, but I did think it would be a little more exciting.
Maybe you’re like me, and you’ve recently made your last student loan payment. Or maybe you’re approaching the finish line of student loan repayment and are starting to look toward the future to life after student loan debt. What should you do with that extra money in your budget?
First Things First: Find a Way to Mark the Moment
I didn’t really celebrate after I made my last payment on my student loans. I might have breathed a sigh of relief, but I didn’t do anything special to mark the occasion. I probably should have done something to make that final payment seem more final.
Of course, I’m not encouraging you to spend recklessly or get into more debt while celebrating. Have some fun, but don’t ring up more debt while doing so. If you’re not sure how to celebrate being student-loan-debt-free, here are a few ideas:
- Treat Yourself to a Nice Dinner. Go to dinner at your favorite restaurant. Bring your partner and family if you want, or enjoy a meal on your own. You can also invite a few of your closest friends or people who have supported you while you paid down your debt.
- Throw a Party. While it’s definitely not a traditional milestone, you could argue that paying off student debt has become a milestone moment in the lives of many millennials – and for some older people too. Other milestone moments in your life get a party, whether it’s your 30th birthday, your wedding, or the birth of your first child. Why not host a fete to celebrate paying off your debt?
- Plan a Trip. Is there a place you’ve been hoping to visit, but you wanted to focus on paying down your student loans first? Now that you’ve paid them off, one way to reward yourself for setting and achieving this big goal is to finally make plans to go on that trip. Depending on where you go and how long you plan to stay there, it might take a few months before you’re ready to go, so start planning! There are plenty of ways to enjoy a great vacation on a budget.
- Purchase Something You’ve Been Putting Off. When you were laser-focused on paying off your loans, you likely avoided making purchases that weren’t absolute necessities. Maybe you made do with furniture that was on its literal last legs or didn’t upgrade your wardrobe. Now that your loans are gone, you can celebrate by finally replacing your old couch or by buying a new pair of shoes.
One last note about celebrating after paying off your student loans: It’s all too easy to go overboard here. You’re feeling accomplished, and you might be feeling flush, especially if you’ve been putting a significant chunk of your monthly income to debt payments. But once you’ve allowed yourself a little celebration, it’s important to figure out what you’re going to do with that extra money ASAP. Here are some ideas.
1. Focus on Paying Down Other Debt
What’s next for you financially now that your student loan debt is gone? For people who still have debt – whether it’s credit card debt, a car loan, or another type of high-interest debt – the answer is: Pay it down.
In fact, most debt repayment methods encourage borrowers to take the money you were previously paying toward your student loans and put it toward any remaining debts. That way, you can knock out this debt faster than you would if you directed those funds to another financial goal.
One of the great things about paying off your student loans is that doing so makes it easier to pay down any remaining debts. You’re riding high on the accomplishment of paying a debt in full. You know that you can do it at this point. Whether you have one or more debts to go, you’ll have added confidence that you’ll be able to pay them off.
How should you decide which remaining debts to pay off first if you have more than one? It’s usually a good idea to focus on the debt with the highest interest rate, such as credit card debt, first. Once you’ve eliminated that debt, you can apply the amount you were paying toward it to the next debt on your list, and so on, until you’ve knocked everything out.
2. Build Up Your Emergency Fund
People with a little extra money in their budget often wonder if they should pay down their debts first or build up an emergency fund first.
If you still have some debts remaining after you’ve paid off your student loans, and you don’t have any money in savings at all, it’s probably better to focus on building up a small emergency fund before you put any extra monthly income toward paying down remaining debts. Open a Savings Builder account with CIT Bank and take advantage of their above-average interest rates.
If you have no savings, there’s nothing to protect you from going deeper into debt if something comes up, such as an injury or illness, car troubles, or a broken appliance in your home. So it’s worthwhile to put aside some money, whether it’s $500 or $1,000, before you zero in on additional debt repayments. Once you get to the point where you don’t have any debts left, you can really focus on beefing up your emergency fund.
How much should you aim to save?
The standard recommendation is to set aside enough money to cover your living costs for three to six months. It all depends on your situation, though. If you’re the sole breadwinner in your family, you might want to save more. If you’re in a couple and you both do paid work, you might be able to have less in an emergency fund, especially if you have a lot of disposable income.
As a freelancer, I aim to have a full year’s worth of savings set aside. That way, if anything crazy happens in my life, such as me no longer being able to work, I’ll at least have one year’s worth of expenses covered.
The main thing to keep in mind when deciding on a target is to come up with a goal that makes you feel comfortable. If you won’t be able to sleep well at night until you have a full year’s worth of expenses saved up, then aim for that. If you’re fine with just a few months’ savings, then make that your goal.
3. Save Up for a Big Goal
Thirty-eight percent of homebuyers are millennials born between 1980 and 1998, according to the National Association of Realtors’ (NAR) 2020 Home Buyer and Seller Generational Trends Report. Millennials have experienced several obstacles on the path to homeownership, including the COVID-19 pandemic and high levels of student loan debt. A lender is more likely to expect a homebuyer to have a sizable down payment saved up — much more than the 7.8% the average millennial puts down, according to NAR.
Although it’s not the sole reason why homeownership rates are lower among millennials, student loan debt is a big impediment. Once you pay off your student loans, your next financial goal might be to start saving for a down payment and take the first steps to getting yourself on the property ladder.
Buying a house isn’t for everyone, though. You might have managed to buy a house while you still had student loan debt, or you might have no interest in being a homeowner at all. If that’s the case, other financial goals you might consider setting now that your loans are gone include:
- Saving for Your Kids’ College Education. Want to help your children avoid taking on massive amounts of student debt when it’s their turn to go to college? Start saving for their education today, even if they’re babies. You can open a 529 plan to set aside money specifically for their post-secondary education. CollegeBacker is a great place to start with this.
- Saving for a Relocation. You might not want to buy a home, but you might be interested in moving. If your family has outgrown its current home or apartment, or if you’ve been interested in relocating across the U.S. or moving abroad, now can be the ideal time to make plans to do so.
- Saving for a Career Change or to Launch Your Own Business. Perhaps you’ve dreamed of trying something new by changing careers or starting your own business. Once your student loan and other debts are gone, you can pour your disposable income and spare time into making these dreams come true.
- Saving for Additional Education. One of the frustrating things about having a lot of student loan debt is that it can interfere with your additional educational goals. Maybe you want to get a Ph.D. or other advanced degree but were hesitant to do so because you had so much debt. Now’s your chance to start saving for additional education so that you can take the next step in your life and career.
In the long run, what matters most is having a goal and a purpose for your money. If you don’t assign your money a role to play, it’s way too easy to fritter it away on things you don’t need that won’t help you live your best life in the long run.
4. Don’t Forget About Retirement
Along with homeownership, millennials have also fallen behind previous generations when it comes to retirement savings. According to a report from the National Institute on Retirement Security, about 21% of millennials worry about their retirement security, and more than 66% are worried they’ll run out of money during retirement.
If you’ve been so focused on paying off your student loans that you’ve neglected to save for retirement, it’s time to start. If you work for a company that offers a retirement plan, dig in and learn what you can about it. Find out if your employer offers a match, how much you can contribute, and where your investments are held.
Maybe you’ve already been contributing to an employer-sponsored plan. If so, then now’s a good time to ask yourself if you can comfortably increase your contributions. Another option is to consider opening a second retirement account, such as a traditional or Roth IRA through a broker like J.P. Morgan Investing, and contributing to that.
Now that you don’t have to think about your student loans, you might find that you’re more interested or better able to plan for your retirement, rather than just guessing at how much you should be saving.
It might seem far off at this point, but it’s still worthwhile to think about how you’d like to live once you retire and how much you’ll need each year. If you feel overwhelmed, consider hiring a certified financial planner (CFP) or a financial advisor to help you make heads and tails of what you need to do to thrive in retirement and for assistance with budgeting now and for the future. If you need help choosing a financial advisor, check out SmartAsset. Answer a few questions, and they’ll give you several options in your area so you can determine the best match.
Once you’ve figured out how much you’ll need to survive and live comfortably in retirement, you can figure out how much you need to save each month or each year. A CFP can also help you work on other financial goals, such as buying a home or planning for your kids’ education.
5. Boost Your Insurance Coverage
While you were working hard to pay off your student loans, you might have kept your insurance coverage to a minimum to keep your premiums low. Now that your loans are paid off, it’s worthwhile to take a close look at your insurance coverage and increase it where needed.
There are three different types of insurance coverage you should think about increasing after paying off your loans.
If you die, the benefits from a life insurance policy will financially support any dependents you have. How much life insurance you need depends on your income, how long you think your dependents will need the policy, and how much of a monthly premium you can afford. If you don’t currently have life insurance, consider getting it through a company like Ladder. If you have a policy, make sure it provides enough coverage.
Also, take a closer look at disability insurance. Disability insurance offers financial protection if you become unable to work because of an injury or illness. How long the insurance provides benefits depends on whether it’s short-term or long-term. Short-term disability coverage is usually for less than six months, while long-term disability insurance provides benefits for years.
Some employers offer group disability insurance protection, similar to group health insurance plans, but not all do. If your employer doesn’t, consider looking into an individual disability insurance plan through PolicyGenius, especially if you’re the primary earner in your home and you’ve worked hard to get where you are in your career.
Finally, revisit your health insurance coverage. If you have a catastrophic plan or purchased the cheapest plan available, consider increasing your monthly premiums to get more protection.
Even if you’re currently in excellent health, a health insurance plan with lower out-of-pocket expenses can be a good idea if you have a family history of certain illnesses. You’ll pay a higher monthly premium but will most likely have a lower deductible and reduced copays.
Whether you end up changing your insurance policies or not, it’s a good idea to evaluate what you currently have and decide whether it works for you. If your policies don’t offer the coverage or protection you need, consider paying more each month to get the coverage you want.
Pro tip: If you prefer having a high deductible plan so you can keep your monthly premiums low, looking into adding a health savings account (HSA) from Lively. It will offer a little extra protection in case something unexpected happens.
Although clicking “pay” on your student loans for the last time might not have come with the fanfare you were anticipating, being finished with your student debt is a big deal.
You now have the ability to move forward and map out the rest of your life. You’ve achieved one major personal finance goal, which can give you the gumption and willpower you need to get out there and work on new ones. Use what you learned when paying off your student debt and apply it to future financial decisions, whether you want to pay off more debt, build up more savings, or start taking retirement planning seriously.
What do you plan to do after paying off your student loans?