After many months of rumors and significant pressure from his left flank in the Democratic Party, President Joe Biden recently announced a plan to relieve the student debt pressure that many younger adults say is keeping them from achieving their financial dreams. If you earn less than $125,000 ($250,000 for married couples), you are eligible for $10,000 in debt relief – increased to $20,000 if you paid for college using Pell Grants. If you qualify for this forgiveness, you may be wondering what to do with this money you no longer have to pay back. While it may be tempting to book a vacation, this is the perfect time to think about your financial future, particularly.
For help figuring out how to use your student loan forgiveness cash, consider working with a financial advisor.
Save More For Retirement
The first option you have for your extra money is to put it into your preferred retirement savings vehicle. If you use a 401(k), you can in theory use it as a cushion to up your contributions. Though you can’t typically just write a check to your 401(k) plan, that extra $10,000 you don’t have budgeted any longer for student loans, can help cover other expenses while you defer an equivalent $10,000 from your paycheck to your 401(k). The 401(k) limit for 2022 is $20,200. If you use an individual retirement account, the limit is $6,000, so you can max out your contributions for 2022 and then put another $4,000 in next year, if you wish. (With an IRA, you do not need to defer contributions directly from your paycheck.)
The retirement industry is anticipating a big increase in retirement savings as a result of this action.
Invest in the Stock Market
If you want to take a bit more risk, you can also invest directly. This could be through picking individual stocks, investing in fixed-income securities like bonds or by finding a mutual fund and putting your money into it.
You can start a brokerage account with an online brokerage like ETrade and start investing right away. However, if you’re new to the investing world – and plenty of people who qualify for this loan forgiveness program are – you should consider finding a financial advisor to guide you.
Pay Down Other Debts
Just because you’re having some of your student debt erased doesn’t mean you don’t have other debt. Maybe you bought a car and have some auto debt outstanding. You could use some of the student loan forgiveness money to take a big chunk out of that. You could also make some headway on your mortgage or erase that nasty bit of credit card debt you piled up furnishing your apartment after you left school. Here’s a guide to paying off debt.
Get to Saving
The safest thing to do might be just to take the $10,000 you would have paid on your student loans and instead save it. A savings account is an option, but make sure you look for a high-yield savings account, which are generally found online. The best rates are currently north of 2%.
An even better option might be a certificate of deposit. You can take your $10,000 and give it to the bank for a predetermined amount of time, in exchange for a much higher interest rate than you’d get on a savings account. If you can afford a five or even 10 year CD, the interest when you finally get the money back could be substantial, especially if you find a CD that offers daily compounding.
The Bottom Line
President Joe Biden is forgiving $10,000 in student loans to those earning less than $125,000 annually. If you qualify and you want to know what to do with this extra cash, look at financial planning basics and consider investing or saving the money.
Financial Planning Tips
A financial advisor will help you figure out the best thing to do with your money. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Thinking of investing but can’t picture what your investment will look like down the road? Use SmartAsset’s free investment calculator to get a sense.
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