So Your Student Loans Were Forgiven. Now What?
Arguably the biggest economic news in years was released last week when President Biden announced a massive student loan debt relief program.
It’s so big that no one can quite pin down exactly how much it will cost over the next ten years. The White House said it will cost $240 billion, The Committee for a Responsible Federal Budget says it will cost $500 billion, while The Wharton School of the University of Pennsylvania estimates it will cost over $1 trillion.
It should concern us all that the estimates vary so much. How can we know how we will pay for this program if different and respected organizations can’t even come close to agreeing on the cost?
Whatever the cost ends up to be, we can all agree this program will have a huge impact on individuals with student loan debt.
There are several rules and guidelines to follow to benefit from this program, but the upshot is that individuals with Pell Grants will have up to $20,000 in student loan debt erased, while other types of borrowers will have up to $10,000 taken off their bill.
Those with private loans only won’t be affected.
President Biden also announced the pause on repaying student loans that has been in place since the beginning of the pandemic in 2020 will be extended until the end of the year. He stated this would be the last extension.
In other words, if this debt cancellation plan doesn’t wipe out your debt entirely, be ready to resume making payments in January of 2023.
Various online sources estimate the average monthly payment for student loans is between $200 and $400.
If your student loan bill is, say, $300/month, start planning now: having a sudden $300 monthly expense for the first time since March of 2020 will be quite a shock to your finances.
But what should you do with the $300 you used to pay every month if your student loans are completely gone?
Well first, celebrate. Keep it down, though, so you don’t upset your neighbors when it dawns on them that they’ll soon be paying your student loans for you through increased taxes.
After that, I’d take a hard look at your finances. With your student loan debt gone, and $300/month freed up, what should your next financial goal be?
If you’ve been a long-time reader of this column, you know what I’m going to say next: Establish a fully-funded emergency fund!
Bankrate polled 1,025 adults in June, and found that 37% of households earning less than $50,000/year had no emergency fund at all.
If you’re in that boat, take the $300/month that you were paying towards your student loans and establish your emergency fund. A fully-funded emergency fund is the best way to stay out of debt.
If your car needs repairs, you have sudden unexpected medical bills, your microwave dies, or your basement springs a leak, your emergency fund allows you to take care of those problems without borrowing money.
The common advice is to put enough money in a savings account to pay your living expenses for 3-6 months. With all the economic uncertainty and sky-high inflation recently, I’d recommend you save enough money to pay at least four months’ worth of expenses.
That might sound like a lot of money to pile up, but since you’ve got $300/month that you used to send to your student loan company, you’ll get there faster than you think.
If you’ve already got a fully-funded emergency fund, then move on to your next financial goal, whether it is paying off another debt, saving for retirement, saving for your children’s college, saving for a home, or something else.
Most people don’t often have extra money show up in their budget because a debt just disappears.
If this will be your situation soon due to the student loan forgiveness plan, congratulations.
Take advantage of your good luck by planning right now what you will do with that extra money.