Americans’ student debt burden is set to ease, and what are people planning next for the freed up money? Borrowers seem to have two main goals in mind: staying current on their other debts and getting ahead in their investment portfolio.
That’s according to a MarketWatch poll that asked borrowers about their financial plans after debt relief.
In late August, President Joe Biden announced that the government would forgive up to $10,000 in student loan debt for people with federal student loans and up to $20,000 for Pell grant recipients. To qualify, borrowers must earn less than $125,000 a year. Student loan payments that have been suspended since the outbreak began in March 2020 are scheduled to resume in January 2023.
The debt relief, through an executive order, prompted cautious applause from debt-ridden creditors, who now await further details. He offered sharp criticism for canceling student loans.
While people wait for more details about the forgiveness application process (and some critics will take legal action to block the plan), some MarketWatch readers say they know what to do when they don’t have student loan payments. No more.
Investing was the top voter when MarketWatch polled TWTR on Twitter.
Asking people what they plan to do with the money, otherwise it would go toward paying off student debt.
Four out of 10 people (39%) said they would invest and secondly, 35.6% of voters said they would pay off other debts.
Here are the full results:
It’s an unscientific comment made via social media. And MarketWatch, by its name, is focused on the markets and the economy, so it may not be easy to imagine online followers keeping their investment portfolios in mind.
But investing more and paying down other debts are the right next steps for borrowers, regardless of who’s voting.
According to the Federal Reserve Bank of New York, there are more than 43 million student loan borrowers with approximately $1.6 trillion. The largest share of them, more than a quarter, had balances between $10,000 and $25,000 at the end of last year. Three-quarters of the forgiven debt benefits will go to households earning up to $88,000, according to Penn Wharton’s budget model estimates.
This type of financial relief poses certain personal finance questions. Debt forgiveness eases future obligations and frees up more money now. But it’s not a stimulus check that goes straight into your bank account and gives you instant extra cash.
In addition, federal student loan payments have been frozen for the past two and a half years. At that time, inflation ran high and probably ate away at money that could have been paid for. Choppy stock markets and worries about an economic slowdown may cause some people to shy away from further investments.
As borrowers consider how to use the money unlocked by student loan forgiveness, Larry Pohn, a Redwood Shores, Calif. accountant and financial planner, suggests asking themselves: “If you’re not going to spend this money, where is it going to come from?” “
One method could be to review your monthly student loan payments before the pandemic hit and link that amount, or a portion of it, to a remote account from your regular checking account, said Andres Garcia-Amaya, founder and CEO of Zoe Financial.
That way, one can avoid seeing the freed money being spent on regular expenses or buying on impulse, Garcia Amaya said. Zoe Financial is a platform that helps people find certified financial advisors based on their location, expertise and investment approach, and Garcia-Amaya said that since the Biden administration’s announcement, people have been looking for advisors who can provide guidance on student loans.
For anyone wondering what to do next, MarketWatch asked financial experts to weigh in. The most important thing is to make sure you have enough to pay the bills and stay current. After that, the paths may vary depending on specific financial realities.
A smart way to pay off other debts
“The first question a person should ask is, ‘How much interest am I paying on my debts?'” says Garcia-Amaya. That’s what it says.
When adding up borrowing costs, high-interest debt like credit card balances should be at the top of the to-do list, say Garcia-Amaya, Pon et al. If someone has delinquent credit card debt, Garcia-Amaya said he’s hard-pressed to think of many investment scenarios with double-digit rates that could match the high-teens interest rates someone is paying now.
Interest rates on low-cost debt now face a greater disparity with potential investment rates, he said. But credit card debt is a striking example at a time when Americans are carrying nearly $890 billion in credit card balances.
The typical annual percentage rate (APR) for new credit card offers was 17.96 percent at the end of August, according to Bankrate.com. That rate is up from 17.87 percent before the recent outbreak. Credit card rates are directly affected by the Federal Reserve’s own key interest rate, so rates can go up. Central banks feel poised to keep it up in the fight against inflation.
The so-called “snowball” method, in which a person first destroys the smallest debts, and then there are other ways to move on to bigger debts, regardless of the size. It should build the mental energy of becoming debt free.
Paying off high-interest debt early may be more financially efficient, but the emotional boost may be worth more to some people. “We can always use the best psychology we can find,” Pon said.
It will make more sense to invest
For someone with low interest rates (perhaps a refinanced loan during the pandemic) and some cash to cushion unexpected shocks, investing can be a good next step.
It is important to think about what the investment is and when the money should arrive.
If it’s a long-term goal such as a comfortable retirement, the lost stock price now could be a bargain that will deliver rewards for decades to come, says Bloomington, Minn. Grant Meyer, financial planner at GTS Financial, previously told MarketWatch.
Equity ETFs can be a good bet for long-term investments, Jackie Fontana, financial planner and portfolio manager at FBB Capital Partners, told MarketWatch at the time.
The Dow Jones Industrial Average DJIA;
It’s down more than 14 percent this year, and the S&P 500 SPX;
It is down more than 17% year to date.
“History tells us that the stock market is more likely to be higher in 10, 20 or 30 years. That’s the perfect investment for your retirement or some other goal decades from now,” says Tara Unverzagt of South Bay Financial in Torrance, Calif.
But if it’s a more immediate goal, like a down payment for more school or money in the years to come, Unverzagt says the individual should significantly reduce the risk.
Conservative, highly liquid accounts like money market funds can be a good place to put free cash in this instance, Garcia-Amaya said.
“You don’t want to invest in something speculative like the stock market. “History shows that in 1, 3, 5, or 10 years, the stock market can go down,” Unverzagt wrote. “Don’t set yourself up for a fire sale at the worst of the market cycle. Or worse, postpone that home purchase or graduate school for 5 years until the market recovers.”