What Percentage of Your Gross Salary Does the Consumer Financial Protection Bureau?

Studying is something important and therefore there are student loans to make it affordable for people to get education. However, it is important for you to note that the Consumer Financial Protection Bureau (CFPB) recommends that borrowing is no more than you expect to make in one year after graduating from college. You may wonder what percentage of your salary that needs to go to student loans and for other expenses. Here, you will get the explanation about it.

The Percentage of Your Gross Salary for Student Loans and Other Categories

According to the Education Loan Finance, the percentage of your salary that needs to go to student loans ideally is no more than 8% of your gross salary. Your payments may be different based on the interest, principal amount, and repayment term. If you want to be able to manage your loans, it is important for you to understand the amount that you are able to afford to pay and the things that you can do to reduce your payments if it is too high.

If you want to know the percentage of your salary that goes to your education debt, you need to calculate it by dividing your monthly student loan payment by your gross monthly salary. Note that the salary here is before being cut by taxes. For example, as cited from Education Loan Finance, your gross monthly salary is $5,000 and your student loan payments are $350 per month. If so, you have  to divide your payment by your monthly salary as you can see below.

$350 ÷ $5,000 = 0.07

Then, you have to multiply the result by 100 so that you are able to find the percentage of your salary that goes to your student loan payments.

0.07 x 100 = 7%

So, from this example, the money which is used to pay student loan payments is 7% of the gross monthly salary. This number does not violate the rule where it is recommended no more than 8%.

However, cited from Live Well site, the Consumer Financial Protection Bureau provides general guidelines to help people determine the percentage of their gross salary where for debt payments, such as student loans, credit card bills, and car loans should not exceed 20% of your gross salary. So, people still can maintain their healthy financial outlook and can avoid the burden of excessive debt. For housing, this agency suggests that no more than 30% of your gross salary should be allocated to housing expenses, such as property taxes, rent payments or mortgage, and homeowners or renters insurance.

The Consumer Financial Protection Bureau also recommends people to save at least 20% of their gross salary to their savings goals. For insurance, CFPB gives a recommendation that people need to budget around 5% to 10% of their gross salary.

However, this percentage may depend on some factors since everyone has different circumstances. Some factors, such as family size, location, and financial obligations can affect the percentage allocation for different categories.

What is the Consumer Financial Protection Bureau (CFPB)?

The Consumer Financial Protection Bureau or (CFPB), as cited from the Live Well site, is a governmental agency which is established under the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 where the main purpose of this agency is to protect the financial interests of consumers and to promote fairness and transparency in the financial marketplace. This agency gives protection to consumers related to mortgages, credit cards, student loans, and other financial products and services so that they are protected from unfair practices. This agency does it by enforcing laws and regulations and also providing educational resources and tools to help consumers. Some topics of resources provided by this agency include saving, budgeting, credit, and mortgage borrowing. By providing educational resources, it is expected that people can make the right financial decisions.

How to Calculate a Monthly Student Loan Cost

In the United States, there are student loans and if you borrow money to pay for your education at college, it means that you need to repay the principal and interest of your loan. Did you know how to calculate a monthly student loan cost? It depends on the type of interest rate that you have and also the current rate. If your student loan is a fixed rate, your monthly payments are similar for the duration of your loan. If your loan is a variable rate, the amount of interest that you need to pay can change over time and your payment that you need to pay per month will be different as well.

Whatever the type of your loan is, the monthly payment that you pay consists of the principal and also the accumulated interest. However, it is important for you to note that interest can increase over time so that the total repayment cost of your loan can be higher than your initial loan amount. Let’s take an example as cited from Education Loan Finance. Let’s say that you borrow $10,000 to pay for college. In this case, you are eligible for a fixed-rate loan for 10 years with a rate of 5.00. If so, your monthly payment is $106. It is also explained that over the life of your loan, you will have to repay a total of $12,728 and interest charges will add over $2,700 to your loan cost.

Things to Consider to Determine the Percentage of Salary to be Allocated

As explained earlier, the Consumer Financial Protection Bureau gives percentage recommendations for people to allocate their salary to different posts. However, everyone may allocate it differently because some factors can affect it. And here are several things that you need to consider when you determine the percentage of your salary to be allocated cited from the Live Well site.

• The Priorities of Your Finance

You need to consider the priorities of your finances and goals. You can allocate a higher percentage for debt repayments, but if you have other priorities, you may have to allocate for debts payments lower.

• The Amount of Your Income

If you have higher income, you may be able to allocate it flexibly. It means the amount of your income will affect the percentage to be allocated to various categories.

• Cost of Living

The cost of living in every area is different. For example, if you live in an area with a high cost of living, you need to allocate a larger percentage to housing and other important expenses.

• The Number of Your Family Members and Responsibilities

Let’s say that you have family members that you have to support. If so, you need to consider their financial needs when you allocate your salary.

• Debt Obligations

Do you have debt obligations like student loans or credit card debt? If so, you need to allocate a higher percentage to debt repayment if you want to reduce your debt burden.

• Employer Benefits

Do you get an employer benefit or a retirement plan? If so, you may need to allocate a number of percentages to it.

• Financial Goals for Future

You may also have to consider any financial goals that you want to achieve in the future. For example, you probably want to start a business, pursue further education, or any other things. In this case, you may have to adjust your allocation and increase the percentage of your savings.