Morgan Stanley
  • Wealth Management
  • Aug 23, 2021

Yes, You Can Save and Pay Down Student Loans at the Same Time

Discover how to tackle paying off your student loans while still making progress toward other financial goals, like saving for your future.

Committing to paying off your student loans is an important decision in your financial life. But it doesn’t mean other important goals—like saving for your future—should be put on the back burner until you’re totally rid of your college debt. Here are a few easy but effective ways to tackle student loans, while saving at the same time.

Pick a realistic timeline

The average borrower takes on about $30,000 to pay for college1, and the Department of Education assumes a repayment timeline that typically spans ten years2, up to 30 years for consolidated loans2. Because your unique financial situation will dictate how long it takes you to pay off your student loan debt, identifying a realistic timeline for how long it will take you to repay your student loans is an important step in figuring out how to pay down debt, build your savings—and stay motivated to do both for the long term.

Figure out your realistic debt paydown timeline by tallying how much you owe compared to your income and other financial obligations. Make a list of shorter- and longer-term personal goals you'd like to work towards to—like moving to a new city, starting a family, or traveling abroad—along with saving. Though you have to pay the minimum amount due for each of your student loans every month, this approach may help you see where you have some financial leeway to dedicate a little bit of money to savings, while working towards other goals and taking control of your debt. Remember that saving early and often can be as important as the amount you can afford to set aside. After all, saving just $50 a month could mean having $600 saved one year from now!

Know where your money goes

For at least one month, commit to tracking every dollar you spend so you know exactly where your money goes (and if it's where you intended to spend it). If your tracking reveals that you can't afford to save much money after you've accounted for unavoidable expenses and student loan debts, consider making some small but empowering changes. For example, sticking to a grocery list or cooking one meal at home that you'd normally eat out could mean an extra $10 in your pocket each week. (That’s $40 you could put into a savings account each month, without much sacrifice). Likewise, a simple temporary side gig like pet sitting for a neighbor who travels for work or offloading some unwanted items for resale at a consignment shop could help you generate extra cash you can use to start saving. Instead of viewing changes to your spending or earning habits as sacrifices, consider them important moves toward having the financial life you want.

Use the tangible value of having savings to stay motivated

Knowing that you owe more money than you "own" in the form of savings can be stressful and can impact the quality of your life. In fact, the Pew Research Center reports that just 32% of young college graduates with student loans say they are living comfortably, compared to 51% of college graduates of a similar age who don't have outstanding loans and say the same3. Stay motivated by remembering that your financial life may get easier when you tackle your loans and save at the same time. Not only can a savings account be a financial safety of sorts so that you don’t have to borrow from high-interest rate loans or credit cards if you have a financial emergency, it can give you the peace of mind that you will still be able to meet your financial obligations in case of job loss or illness. Experts recommend that you set an initial goal of saving at least three months of your living expenses and eventually build up to six months worth. Break that big goal into manageable steps by establishing automatic contributions from each paycheck into an interest-bearing, fee-free savings account that you won't be tempted to tap into.

Remember that saving for retirement in your employer's retirement plan or an IRA that you establish on your own outside of work can also provide more financial benefits later when you start early—even if you only contribute small amounts of money to your account. For example, the IRS explains that a person who saves just $50 a month for retirement for 20 years will have $23,218 saved, assuming a 6% annual return4. If your employer offers to "match" your retirement contributions up to a certain amount, contribute at least enough to your workplace retirement plan to claim this important benefit.

Take advantage of tools that make saving and managing debt easier

Debts carrying the highest interest rates technically cost you the most money to carry each month. The sooner you pay them off, the more money you'll have to pay down remaining debts and put towards a savings account. Make a list of all your student loan debts and the interest rate on each; prioritize one or two with the highest rates, while paying at least the minimum amount due on the others. If you get a bonus, cash as a gift around the holidays, an annual raise or a tax refund, consider putting some, half, or most of that extra cash towards your highest interest rate loans and the remainder towards savings to fuel both of your goals at the same time. And take advantage of free tools like debt calculators that make it easier to understand how long you'll have to wait to see your debt disappear, and how much you should try to save each month to reach your savings goals.