Since Biden announced the student debt relief plan in August, there’s been animated conversation around the topic. The issue has fervent advocates on both sides, not to mention the more significant questions it raises about the cost and value of education in America.
The rising cost of college since the 80’s has left around 45 million Americans with student loan debt. And according to President Biden, "…the burden is so heavy that even if you graduate, you may not have access to a middle-class life that a college degree once provided."
It may be a controversial topic, but one thing’s for sure—the sooner you pay off your debt, the better off you'll be. And whether you're for or against student loan debt relief, you probably know someone who will benefit from it.
Let's see how it works and how you can use this chance to grow your net worth faster.
How the Student Debt Relief Plan Works
The U.S Department of Education will provide $10,000 in debt cancellation to non Pell Grant recipients. And $20,000 in debt cancellation to Pell Grant recipients with loans held by the Department of Education.
The plan aims to give some breathing room to student loan borrowers after the COVID-19 pause on payments, and would be extended to December 31st 2022. This is the final student loan extension as payments would begin again in January 2023.
Who is Eligible?
- Borrowers eligible for this relief are individuals with income less than $125,000 as a single or a household with income below $250,000.
- Only borrowers with Federal loans are eligible. This debt relief does not cover private loan borrowers.
- This student debt forgiveness applies to undergraduate, graduate, and PLUS loans. Current students are also eligible if the loans were taken out before July 2022. But for students still claimed as dependents under their parents' tax returns, their eligibility will be based on their parent's income, not theirs.
What Do You Need to Receive This Loan Forgiveness?
Applications will come out in a few weeks for you or your children to apply for loan cancellation. If you're eligible, you can expect to get your relief in 4-6 weeks after application. The Department of Education is still figuring out the process, but they plan to open the application in October.
If you want to get a notification from the U.S. Department of Education when the application is open, please sign up for Federal Student Loan Borrower Updates with the Department of Education’s subscription page to get information on this debt relief program.
How to Use Student Loan Forgiveness as an Opportunity to Improve your Financial Future
All political views aside, the student loan forgiveness plan is a jump start for people who still have a lot of high-interest debt to pay down. Besides, it might be the perfect time to reassess your financial situation (and your relationship with money in general) especially if you have other debt in addition to student loans.
Now, how will you use this as a springboard to be proactive around your money and debt? If you have eligible student loan debt, we recommend you take this opportunity and use it to grow your net worth. For example:
- Recalculate the amount you owe after the relief and start paying a higher monthly payment.
- Start with highest-interest debt first, like credit card debt.
- Build up your emergency savings fund if you don’t have one already.
- Contribute the money you saved to a Roth IRA, or make a down payment on a home.
- Plan ahead to avoid going into debt again by creating a simple budget (one you can actually follow)
If you’ll be getting your part or all of your loan canceled, try to view it as an opportunity. Instead of spending it on something frivolous, think about how you'll leverage this extra money to set yourself up for a better future.
Also, note that managing or paying off debt is part of a long-term financial plan. Have you thought about the big picture of your financial future lately? A fiduciary financial advisor can help you create a plan if you don’t have one, or provide a check up if it’s been a while.
At Wealth Legacy Institute, our mission is to design a financial plan that brings your vision, values, and goals to fruition. We offer financial advice to help you make your retirement dream a reality. Download our free Essential Retirement Planning Guide to start preparing for a more successful retirement.
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