The Biden administration’s plan to forgive $10,000 in student loans for individual borrowers making less than $125,000 annually will make a significant dent in the debt of millions. The amount of forgiveness will be $20,000 for those who went to college on Pell Grants.
About 54% of borrowers with outstanding education debt owed less than $20,000, according to the CollegeBoard. Married couples and heads of households have an income limit of $250,000. All borrowers combined owe about $1.6 trillion in federal student loan debt.
With a significant number of borrowers having their balances canceled out, money you have earmarked to pay off your student loans may suddenly be freed up. There are many ways to put that extra cash to use, from building an emergency fund to stuffing your retirement coffers.
“If your student loan is forgiven, use the funds you would have paid the lender to instead pay yourself,” says Gabe Krajicek, CEO of the fintech community bank company Kasasa. “Rather than seeing this as extra spending cash and mindlessly fueling lifestyle creep, put this toward reaching your own financial goals. Be intentional and stay curious about financial literacy.”
An emergency fund is a savings account designed to cover unexpected expenses, such as a job loss, major car repair, or broken computer. You shouldn’t tap this fund except in the case of a series financial crises. For instance, don’t use the money for a down payment on your home or as a nest egg for retirement.
Experts recommend saving three to six months of living expenses in your emergency fund. With $10,000 of student loans forgiven, some of the money you may have set aside for your loans could be used to create an emergency fund. This will provide a safety net should you face unfortunate financial challenges.
“While you’re sorting out the best way to make your money work for you, put it into a high-yield savings account so you can earn interest without losing access to it when you most need cash quickly,” says Krajicek. “The best rates are usually found at community banks and credit unions.”
Credit card debt often comes with a higher APR than student loan debt and can cost you a significant amount of money in interest over time. While your credit card debt may have taken a backseat to your student loan payments over the past several years, now may be a great opportunity to pay down high-interest debt.
Among the two most popular strategies to pay down debt are the debt avalanche and the debt snowball.
With a debt avalanche, you pay off your loan with the highest interest rate first. Once your highest interest rate debt is paid off, you move on to the next-highest interest rate, and so on down the line.
The debt snowball method has you start by paying down your smallest debt first. You will pay the most on the smallest debt and the minimum on the rest.
“Every individual has unique circumstances and different goals, but typically when someone has extra money, it is best to either put that toward paying down debt — prioritizing the highest interest rate — or building up savings to ensure they have a sufficient ’emergency fund’ to cover unplanned life surprises,” says Chris Ebeling, head of student lending at Citizens Bank.
It’s never too early to start planning for your retirement, even if you’re young. Setting aside even a small amount of money early in your career will make it easier to live comfortably after you’re done working.
Many experts recommend putting 15% to 20% of your pre-tax income each year toward retirement, and using your extra money to jump-start your retirement savings can help you quickly reach that goal.
If you’ve saved up for an emergency, paid off debt, and socked money away for retirement, you may consider dipping your toe into the investing waters. For those who have never invested before, don’t sweat it — we have a beginner’s guide to investing.
Investing can help you grow your wealth and improve your financial situation. You may want to work with a financial advisor to make decisions about where to invest your money.
“Learn about stocks, mutual funds, real estate investing, and the best ways to invest for a healthy retirement. Diversify your investments to help mitigate risks and maximize returns,” Krajicek says.
If all of your other financial goals are in good shape, you should consider putting some of the money you have earmarked for your loans toward a purchase that makes you happy. Maybe that’s a new TV or a down payment on a car. Just remember — it’s ok to spend your freed up cash on pleasure too.
Keep in mind that unless you have money saved up to pay down your loans — perhaps you were waiting to pay them off until the repayment pause ended — this widescale loan forgiveness won’t give you new money. In this way, it functions differently from the stimulus checks handed out earlier in the pandemic.
“Of course, forgiveness won’t immediately save an individual money until repayment resumes, unless they are in the position of planning to pay off the loan entirely after forgiveness,” Ebeling says. “Individuals will also need to understand if they qualify for forgiveness.”
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