December 30, 2021 – By Jaime Catmull
Under President Joe Biden, more than 638,000 borrowers have had their student loan debt forgiven or are in the process of having their student loans forgiven, NPR reported. If you fall into this category, you may now have some more wiggle room in your budget — so what should you do with these extra funds? I spoke to financial experts to get their best advice.
Cover All Necessary Expenses
“To prioritize those extra funds, look at necessities, such as housing, groceries, transportation and education,” said Stacey MacPhetres, student loan expert and senior director of education finance at EdAssist Solutions. “Recognize how extra money in your pocket can better yourself and your family.”
Pay Down Other Debts
If you have credit card debt or other non-mortgage debt, focus on paying this down with the funds you had previously been putting toward student loan payments.
“For those whose personal balance is skewed toward liabilities, we would advocate continuing to pay down debt and right-size their personal accounts with the new debt forgiveness,” said Adam Green, co-founder and CEO of Yeildx.
Focus on paying down high-interest debt first, said Katie Ross, executive vice president at American Consumer Credit Counseling.
“For those who now have more wiggle room in their budget, it may be a good idea to tackle high-interest credit card debt, especially for those who went over-budget with holiday shopping and will be getting their credit card bills that may be bigger than expected,” she said. “The average credit card interest rate is nearly 20%, so for consumers who don’t pay their bill in full every month, that debt can add up quickly.”
Even if you don’t have holiday shopping debt, you may still be carrying over debt from a difficult couple of years.
“Recent data from Tally, the debt payoff app, found that more than half of people with credit card debt increased that debt during the pandemic,” said Bobbi Rebell, CFP and personal finance expert at Tally. “Any relief in student debt is an opportunity to take control of credit card debt if that is you.”
As for which credit card to pay off first, “start with your highest interest rate to your lowest interest rate,” said John Rampton, founder of Due.
Paying down debt can help you prevent a financial crisis and give you more financial flexibility, said Julie Rains, writer and publisher at Investing to Thrive.
“The fewer obligations you have with your finances and the more cash you have, the more you can avoid problems — like not having enough money or credit to pay for an unexpected medical expense or large car repair bill — and take advantage of opportunities, such as putting down a deposit on a new apartment so you can accept a new job in a new city,” she said.
“More specifically, if you’ve got high-interest credit-card debt, loans with a small balance and student loans with interest forbearance, it makes sense to prioritize debt payments and accelerate these payoffs,” Rains continued. “Then, after your debt has been eliminated, you’ll have funds available for saving and investing.”
Build Up an Emergency Fund
Once you’ve paid down non-mortgage debt, your next priority should be your emergency savings, said Barbara Friedberg, investment expert and owner of Robo-advisor Pros and Barbara Friedberg Personal Finance.
“Set up an emergency fund equal to six months of living expenses,” she said. “COVID should remind you of why this is important!”
Having six months of expenses saved in an emergency fund “does two things,” said Derek Sall, owner and blogger at Life And My Finances. “It gives you security when an emergency comes up, and it will keep you from making dumb decisions on any given day because you don’t ever have any money.”
If six months seem too lofty of a goal, start with $1,000.
“Save it as fast as you can,” said George Kamel, a Ramsey personality. “This will help you if something unexpected comes up.”
Save for Retirement
If you have paid down debts and have a sufficient emergency fund, prioritize saving for the long term.
“Allocate more toward your ‘endgame,’” said Nicole Lapin, money expert and author of “Miss Independent: A Simple 12-Step Plan to Start Investing and Grow Your Own Wealth.” “The endgame is where you squirrel money into what your future self will thank you for like savings, investments and retirement.”
“Fund your workplace 401(k) or 403(b) with as much money as you can,” Friedberg added. “If that’s not available, open an IRA at a robo-advisor. The best robo-advisors for beginners offer low minimums, financial advisors and easy setup.”
Katelyn Murray, CFP, financial planner and relationship manager at Kendall Capital, recommends putting the extra funds into a Roth IRA.
“As long as you currently have earned income, you can open a Roth IRA and save the lesser of 100% of your earned income or $6,000 ($7,000 if you’re over age 50) year over year. Since you’re saving to a Roth IRA, these funds are considered ‘after-tax’ retirement savings, meaning that you can extract all principal and earnings 100% tax-free once you’re over 59 ½.”
Although you may not feel the need to prioritize saving for retirement just yet, getting started early is key.
“Money set aside now will have more time to grow,” Rains said.
Make Inflation-Fighting Investments
“To fight back against the current rate of inflation, I would focus on investing in TIPS or I-Bonds that are currently paying 7.12%,” said Bob Lotich, certified educator in personal finance and founder of SeedTime.com.
You should aim to invest however much you used to owe in monthly student loan payments.
“Take the exact amount you had previously been paying to service your student debt, and keep making those payments annually, except into an investment vehicle that takes advantage of the principle of compounding returns,” said Bobby Matson, CEO of Payitoff. “Here’s some basic math. If your student loan payment was $400, if you were to simply invest that same amount of money, every month, in the stock market (let’s say the S&P 500), in 30 years you’ll have a portfolio worth $1,121,808 (if you continue to reinvest your gains, and if the market continues similar performance over the next 30 years as it has over the past 100). That’s a pretty powerful thing to grasp — $400 a month ultimately makes you a millionaire. Since you never expected to have your debt forgiven, you may as well pretend it hasn’t been, and keep making those monthly payments — except instead of paying them to a lender, pay them to yourself.”
