If you got student loan relief, use the savings to ‘jump-start wealth accumulation,’ say financial advisers. Here’s how to get started – Fortune
Hundreds of thousands of Americans were, until very recently, planning to scrimp and save to spend the next few decades paying off cumbersome loans. Under Biden’s debt plan that equation has shifted, leaving the newly debt-unburdened with some enticing choices—and huge opportunities.
While debates about the macroeconomic effects of federal student loan relief continue on, the financial effect for individuals is clear: Millions of federal student loan borrowers will see their monthly student loan repayments be lowered, disappear completely, or be paid off sooner than anticipated. While it isn’t precisely known when Biden’s debt plan (to cancel $10,000 for individual borrowers making under $125,000, and $20,000 for Pell Grant recipients) will technically go into effect, the student loan pause has been extended until January, so borrowers can formulate a plan based on their new personal finance situation. The debt cancellation means that many borrowers will now have more breathing room to work toward other financial goals. According to Bank of America, the debt relief program will result in a median saving of more than $150 per monthly student loan repayment for impacted households. Especially for younger borrowers, this cash flow can go a long way in terms of building wealth.
If you were assuming you would have to start repaying your loans this fall before Biden’s announcement, figuring out your strategy about where to delegate this unexpected cash influx is the best way make your money go the furthest. “Because student borrowers are already accustomed to this fixed monthly expense, they have a really incredible opportunity to jumpstart their wealth accumulation,” explained Megan Slatter, a wealth advisor at Crewe Advisors. “Now, by simply shifting where this monthly payment goes, they get to stop using it to pay someone else each month, and they get to start using it to pay themselves,” explained Slatter.
Start a reserve fund
Slatter says that an emergency fund is priority number one for anyone with a little breathing room following loan forgiveness. For example, if you are planning to buy a car in a few months or don’t have three to six months of rent money saved, building those savings should be top of mind. “Once you have enough in your satisfied savings account, then it’s really important to start focusing on building that investment account,” Slatter explained.
Marguerita Cheng, a financial advisor at Blue Ocean Global Wealth, agreed, explaining that borrowers who just learned they would receive some debt relief should consider their personal order of priorities when deciding where extra cash should be deposited. Cheng advised borrowers to pay off any high interest debt, like credit card debt, and make sure they have enough cash for emergencies and rent before they invest in the …….