What will you do after $10,000 in student loan debt is forgiven? MarketWatch asks, you answer

Andrew Keshner

The cancellation of student loan debt provides borrowers with financial relief while raising some personal financial concerns for them.

Americans’ student debt burden is expected to ease, and people are making plans for the next steps for the cash they free up. Borrowers appear to have two main goals: getting updates on other debt and getting ahead in their portfolios.

That’s according to a MarketWatch poll of borrowers’ post-debt cancellation financial plans.

In late August, President Joe Biden announced that the administration would provide up to $10,000 in student loan debt relief for those with federal student loans and up to $20,000 in student loan debt relief for Pell Grant recipients. Borrowers must earn less than $125,000 per year to qualify. Payment plans for student loans that have been suspended since the pandemic began in March 2020 resumed in January 2023.

Debt relief through the executive order drew cautious applause from debt-strapped borrowers, who are now awaiting more details. It also drew harsh criticism from those without student loan cancellations.

As people await more details on the forgiveness application process (and some critics consider legal action to block the program), some MarketWatch readers said they know what they’ll do when they don’t have to worry about student loan payments.

Investing was the one with the most votes when MarketWatch tweeted a poll (TWTR) that asked people what they planned to do with money that would otherwise be used to pay off student debt.

Nearly four in 10 (39%) said they would invest, followed by 35.6% of voters who said they would pay off other debts.

Here are the full results:

Admittedly, this is an unscientific poll via social media. MarketWatch, as the name suggests, focuses on markets and the economy, so it may not be easy to think that online followers are putting their portfolios first.

But no matter who is voting, investing more and paying down other debts is certainly a valid next step for borrowers.

More than 43 million student loan borrowers owe about $1.6 trillion, according to the Federal Reserve Bank of New York. By the end of last year, the largest share of these (more than a quarter) had balances between $10,000 and $25,000.About three-quarters of debt forgiveness proceeds will go to households earning up to $88,000 a year, according to estimates from the Wharton budget model at the University of Pennsylvania

This form of financial relief creates specific personal financial problems. Debt relief will reduce future debt and free up more cash now. But it’s not a stimulus check that goes into a bank account and provides extra money right away.

Additionally, payments on federal student loans have been suspended for the past two and a half years. Inflation has heated up during that time, potentially eating away at the money that should have been paid for. A volatile stock market and fears of a slowing economy may also have some people shunning more investments.

When borrowers consider how to use the funds unlocked by student loan forgiveness, Larry Pon, an accountant and financial planner in Redwood Shores, Calif., advises them to ask themselves: “If you haven’t spent the money, where is the money going to come from? Where are you from?”

One way could be to review monthly student loan payments that were filed before the pandemic and put the payments together, said Andres Garcia-Amaya, founder and CEO of Zoe Financial. Or some of it is tied to an account other than your regular checking account.

That way, people can avoid seeing the money freed up being used up by everyday expenses or wasted on impulse purchases, Garcia-Amaya said. Zoe Financial, a platform that helps people find vetted financial advisors based on their location, major and investment approach, Garcia-Amaya noted that since the announcement of the Biden administration, people have increasingly sought out guidance on student loans advisor.

For all of you who are thinking about what to do next, MarketWatch asked financial experts to get involved. The most important thing is to make sure you have enough money to pay the bills and get through this difficult time. After that, the path may vary based on specific financial facts.

Smart Ways to Pay Off Other Debts

“The first question someone should ask is, ‘What interest rate am I paying on my debt?'” Garcia-Amaya said.

Garcia-Amaya, Pon and others say higher-interest-rate debt, such as credit card balances, should be the most important in times of rising borrowing costs. If a person has delinquent credit card debt, Garcia-Amaya said he has a hard time imagining that there are many investment options with double-digit rates of return that can match the teenage rates a person has to pay right now.

On lower-cost debt, he said, there are more nuances between considering the interest rates you face now and your potential return on investment. But at a time when Americans have roughly $890 billion in credit card balances, credit card debt is a stark example.

The typical annual interest rate (APR) for new credit card offers was 17.96% as of the end of August, according to Bankrate.com, which beats the recent pre-pandemic rate of 17.87%. Rates are likely to be higher because credit card rates are directly affected by the Fed’s own key rate; central bankers are prepared to keep pushing rates higher to fight inflation.

There are other ways to reduce debt, such as the so-called “snowball” method, where a person eliminates the smallest debt first and then increases it, regardless of interest rates. It should build debt-free spiritual power.

It may be mathematically more efficient to pay off high-interest debt first, but for some, a mood boost may be more valuable. “We can always use the best psychology we can get,” Pang said.

When investing makes more sense

Investing could be a good next step for someone with low-interest debt (perhaps a mortgage refinanced early in the pandemic) and some cash to cushion against unexpected shocks.

It is necessary to consider the purpose of the investment and when access to funds is required.

Grant Meyer, a financial planner at GTS Financial in Bloomington, Minnesota, previously told MarketWatch that if it’s a long-term goal like a comfortable retirement, the now-beaten stock price could be a bargain that offers returns for decades to come.

Jackie Fontana, a financial planner and portfolio manager at FBB Capital Partners, told MarketWatch at the time that stock ETFs can also be good bets for long-term investments.

The Dow Jones Industrial Average is down more than 14% this year, and the S&P 500 is down more than 17% so far this year.

“History tells us that the stock market is very likely to be higher in 10, 20 and 30 years. It’s the perfect investment for retirement, or another goal that will be achieved in a few decades,” said Tara Unverzagt of South Bay, California Financial Partners of Torrance

But if it’s a closer goal, like a down payment on a house or money for more education in the next few years, Unverzagt says the person needs to significantly reduce the risk.

In such a situation, conservative, highly liquid accounts like money market funds could be a good place to release money, Garcia-Amaya said.

“You don’t want to put it in a speculative thing like the stock market. History shows that in any given 1-, 3-, 5- or even 10-year period, the stock market can go down,” Unverzagt wrote. “Don’t sell yourself a big fire sale at the worst of the market cycle. Or worse, put off buying a home or grad school for five years until the market recovers.”

– Andrew Keshner


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09-15-22 0008ET

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