What Percentage of Gross Salary Should Be Allocated to Student Loan Repayment?

Ideally, your student loan payments should only make up a small percentage of your gross monthly pay, such as no more than 10%. However, some income-driven repayment (IDR) plans for federal student loans have borrowers paying considerably less than that. There are also several forgiveness plans that can wipe away federal student debt after you make enough on-time payments on your loans. Students on these programs may reach a different conclusion on how much income to allocate to monthly debt payments.

This guide will explain the average amount of income students should expect to spend on student loan payments, how different repayment plans change the dynamic, and other details about repaying student loans.

What’s the Recommended Percentage?

There are several schools of thought when it comes to the maximum amount of income to allocate to student debt repayment. For example, the Consumer Financial Protection Bureau (CFPB) suggests limiting monthly student debt payments to no more than 10% of your gross monthly income. This means that, if you earn an annual gross income of $50,000, you would make sure your monthly student loan payments never surpass $5,000 per year, or $417 per month.

Another CFPB guideline to consider is limiting total student debt to no more than you expect to earn with a starting annual salary after you graduate.  For example, if the future earnings you expect to receive will be $40,000, aim to borrow less than that. Presumably, keeping debt within this range will translate into monthly payments that make sense for the commensurate level of income.

Factors That May Affect the Allocated Percentage

Keep in mind that many factors can determine the right amount of student debt.

Financial Obligations and Personal Circumstances

Allocating 10% of gross monthly income to student loan debt payments will be easier for some people than others. For example, if you already have a family or other financial obligations like a mortgage, you may need to target a lower percentage of your gross salary to use for student loan repayment.

Repayment Plan

Your repayment plan could dictate how much you pay each month regardless of how much income you have set aside.

For example, IDR plans base monthly payments on income and family size regardless of how much student debt you have. For example, with the Saving On a Valuable Education (SAVE) IDR plan, borrowers pay 5% of their discretionary income toward undergraduate student loans and 10% toward graduate school loans. 

Potential Student Loan Forgiveness

Some student loan forgiveness plans erase student debt after enough qualifying monthly payments are made. For example, Public Service Loan Forgiveness (PSLF) forgives the loans of eligible public service workers after they make at least 120 monthly payments on an IDR plan, provided their work qualifies. Borrowers in this program might decide to pay whatever monthly payment the program requires to have their remaining student debt forgiven after 10 years.

How to Calculate the Percentage to Allocate to Student Loan Repayment

The repayment plan you choose for student loans may ultimately dictate your monthly payment. But it makes sense to make sure you have enough money in your budget to cover student loans. If you want to keep your monthly payment to no more than 10% of your gross monthly income, the calculation for your maximum monthly payment is fairly straightforward.

Divide your gross annual income by 12 months. Your maximum monthly payment should be no more than 10% of that amount. With a gross annual income of $60,000, for example, your maximum monthly payment works out to $500.

$60,000 / 12 months = $5,000

$5,000 x 0.10 = $500

If you decide to repay your student loans using an IDR plan, your monthly payment will be based on your discretionary income. According to the United States Department of Education, discretionary income is based on your annual income, family size, and the state you live in. On the SAVE repayment plan, discretionary income is defined as the "difference between your annual income and 225% of the poverty guideline for your family size and state of residence."

With the Income-Based Repayment (IBR) Plan, the Pay As You Earn (PAYE) Plan, and loan rehabilitation, on the other hand, your discretionary income is the difference between 150% of the poverty guideline for your family size and state of residence.

Tips for Managing Student Loan Repayment

Generally, aim to borrow as little as you can for college, and opt for a more affordable monthly payment. However, there are situations where you may want to pay as much as you can to get out of debt faster. For example, you may want to reduce your debt to better qualify for a mortgage. The right repayment amount to target depends on how much debt you have and your future financial goals.

Consider these tips for managing student loans with minimal impact on your lifestyle.

• Compare different repayment plans for federal student loans: The U.S. Department of Education recommends using its Loan Simulator to estimate your monthly payment on various repayment plans for federal student loans.
• Don't rule out IDR plans: While you may not like the idea of income-driven repayment, or making loan payments for up to 20 to 25 years, these repayment plans can leave you with a very small monthly payment (even as low as $0) if your income is low enough.
• Opt for the standard, 10-year repayment to get out of debt faster: You can also opt for the standard, 10-year repayment plan if you want to pay off student debt faster. You can even accelerate repayment by paying more than the minimum amount due each month.
• Reach out to your loan servicer if you're struggling to keep up: If you find you’re struggling to make your monthly student loan payments, reach out to your loan servicer to ask about your options. It's possible to get temporary relief from federal student debt with deferment or forbearance, although you have to qualify.

The Bottom Line

The amount of money to set aside for student debt will vary from person to person. Have a plan for your debt, and ensure you have enough money to cover student loan payments after paying other bills. Consider budgeting for a monthly student loan payment that's at or below 10% of your gross income, even if you end up paying a much smaller amount on an IDR plan.