By Leslie AlbrechtQuentin Fottrell
Financial advisers weigh in on what to do if your $10,000 or $20,000 in federal student-loan debt is canceled, and what you should NOT do
President Joe Biden made a long-awaited announcement in August that individuals earning less than $125,000 a year would have $10,000 in federal student loan repayments forgiven, but that would rise to $20,000 if they received Pell Grants in college. What’s more, he said people with undergraduate loans would also have a payment cap of 5% of their monthly income.
More than 45 million borrowers owe a cumulative student-loan debt of $1.6 trillion. The White House said it is “a significant burden on America’s middle class. Middle-class borrowers struggle with high monthly payments and ballooning balances that make it harder for them to build wealth, like buying homes, putting away money for retirement, and starting small businesses.”
Some borrowers have been setting aside money since the pandemic-related student loan payment pause started because they expected to throw a lump sum at their loans once payments resumed, said Grant Meyer, a certified financial planner and founder of GTS Financial in Bloomington, Minn. For those who qualified for forgiveness, that was a win-win.
Still, Biden’s announcement was far from a blanket cancellation. Roughly 20 million people, mostly lower-income borrowers, will have their student debt eliminated as a result of the White House’s announcement on Aug. 24. That should make a difference: The Federal Reserve says the average student-loan debt per borrower is $39,351, while the median student-loan debt is $19,281.
“Black and Hispanic borrowers are much more likely than white borrowers to be behind on their loans, and are less likely to have completely repaid their loans,” the Fed said, adding, “The burden of unmanageable student-loan debt may be of greater concern, on average, among individuals who are Black or Hispanic than it is for white individuals.”
The lion’s share of the federal student-loan forgiveness will impact people making far less than $125,000, according to a recent study by the University of Pennsylvania. That study undercuts the argument that millions of wealthy graduates will benefit the most. In fact, Penn says 74% of forgiveness will affect households making less than $82,400 a year.
Here’s what the experts say you should do next:
Invest, invest, invest