Student loan debt is a burden for millions of Americans. Eliminating this debt can feel urgent -- but is it better to pay down debt or save money?
Rita Soledad Fernández Paulino, personal finance coach and founder of Wealth Para Todos, didn’t want student loan debt hanging over her head. So she made a risky decision -- she dipped into her emergency fund, depleting her savings to help erase her loan debt.
Paulino, who goes by Soledad, was working toward building a six-month emergency fund of $30,000. As a teacher, she was likely to receive public service loan forgiveness to wipe out her debt after 120 qualifying payments. But when Soledad had to take time off of work, she dipped into the emergency fund she was still building to pay off her debt.
“I did it in a very extreme way,” she said. “It was like a game and a challenge.”
While she doesn’t regret clearing her debt, in hindsight, she wouldn’t recommend how she did it. Here’s what she learned.
Don’t deplete your emergency fund to pay off your student loans
When Soledad started paying down her student loan debt, she was dealing with health issues and a smaller income. When she became ill and was uncertain if she could return to work, she took her loan repayment plan into her own hands.
Soledad came up with a plan to knock out the $23,000 balance within four months -- an aggressive goal that required cutting back on nonessential expenses.
After getting into the swing of making large payments toward her debt, she made a risky move. She pulled $7,000 from her savings and put it toward her student loans. “It felt like gambling,” said Soledad.
Pulling from your emergency fund for nonessentials can be financially hazardous, and Soledad’s situation was particularly precarious. She was still living off of her husband’s income and disability -- 60% of her income as a teacher -- and had racked up over $10,000 in medical bills. Lowering her savings could have put her in a financially vulnerable position.
While the move worked out for Soledad, she acknowledges that it could have gone wrong very quickly.
“I do wish I would have had more patience and faith that we would eventually be able to increase our income and use that extra cash flow to make debt payments,” she said. She was laser-focused on the goal and less focused on building long-term habits that would help with other financial goals.
If you’re setting a goal to pay off debt, here are less risky methods Soledad recommends.
Cut expenses where you can
Before you start paying more toward your debt, look at your entire financial situation. Do a budgeting exercise to figure out how much is coming in and out of your account each month.
If you find you don’t have enough left at the end of the month to hit your savings goals or put more money towards your debt, comb through nonessential expenses to see if you can cut back anywhere. You might look at gym memberships, streaming subscriptions, takeout and restaurant costs or entertainment spending.
Try to reduce spending that doesn’t align with your lifestyle. When Soledad worked towards her debt-free goal, she found she was able to cut back on memberships, dining out and going out on the weekend, since her illness made it difficult to enjoy those expenses.
The important part is to make sure you know where your money is going and how much is left after paying your bills and other expenses each month. If you don’t have enough money to cover your debt, you might consider short-term ways to increase your income like working a side hustle or freelancing for a few extra hours a week.
Create a debt payoff plan that’s challenging but realistic
Look at all your debt balances and any accruing interest so you have as accurate of a debt payoff goal as possible. Then, create any other money goals you have -- like a sinking fund for a vacation or tickets for a once-in-a-lifetime event to plan for fun appropriately without offsetting your debt payoff plan. If you don’t have an emergency savings account, make sure you create that as a money goal to work towards while paying down your debt.
Next, put monetary amounts to each goal and you can put an estimated timeline together of when you’d like to reach that goal. You may find that some goals are more important and that you’ll need to allocate funds toward competing goals. And that’s OK.
After you crunch the numbers, determine how much more you can comfortably put toward your debt and other savings goals each month. For example, let’s say you have $500 left over in your monthly budget to apply to different goals. Here’s an example of how you might distribute that:
| Money goal | Monthly payment |
| Student loan | $270 |
| Credit card | $100 |
| Emergency fund | $130 |
As long as you’re making the minimum payment on all debt accounts, you can raise or lower this amount as other goals become more important. For example, if you can scale back and save an extra $100 a month, you could apply this to your credit card debt first, or choose to distribute it evenly across your credit card and emergency fund goals.
Tip: Use a debt payoff calculator
If you’re not sure which debt to prioritize, you can use a debt payoff calculator to determine how soon you can pay off your student loans or any other outstanding balances, said Soledad. Adjust the payment amount to see how long it will take you to pay off the balance with different amounts. But make sure it’s an amount that you can stick to.
Then, make a plan and set a debt payoff date. You may use a coloring chart or app to track your progress.
“See which one feels exciting or looks like a challenge but also feels sustainable,” said Soledad. You may be able to make small changes, such as decreasing an unnecessary expense to put extra money toward the debt. “And then when you pay it off, celebrate,” she added.
