Life just got better for millions of student loan borrowers.
President Joe Biden announced Wednesday that he will forgive $10,000 in student loan debt for borrowers who qualify and will extend the federal student loan payment pause through the end of the year.
To qualify for the $10,000 waiver, single borrowers must earn less than $125,000 per year or less than $250,000 per year for couples. Biden also said he would forgive up to $20,000 in debt to those who borrowed under the Pell Grant program for low-income students. The repayment pause was “finally” extended until December 31, 2022.
“Consistent with my campaign pledge, my administration is announcing a plan to give working-class and middle-class families breathing space as they prepare to resume federal student loan payments in January 2023,” the president wrote in a tweet saying he plans to share more details about his plan on Wednesday afternoon.
The action will fulfill a campaign promise Biden made nearly two years ago. Many borrowers had grown concerned, discouraged and impatient at the president’s inaction in recent months, and some had begun to wonder if student loan relief would come to fruition. According to recent federal data, about 43 million Americans owe $1.6 trillion on federal student loans.
The Biden administration “appears to offer targeted help to those who need it,” says Robert Farrington, founder of The College Investor, a website that provides student loan information and advice. “However, I am concerned about the execution.” The Department of Education said borrowers have until the end of the year to seek forgiveness.
Details are still emerging about how Biden will issue widespread student debt relief and its impact on the US economy. But $10,000 could make a significant difference in the lives of many Americans struggling with student loan debt, experts say.
Here’s what you need to know now and how to make smart money if you qualify for student loan forgiveness.
Money moves you can make if you qualify for student loan forgiveness
First, experts recommend continuing to use the suspension of federal loans until the end of the year. Use this time to prioritize other important aspects of your finances, such as: For example, building an emergency fund, paying off high-interest debt, or investing in a traditional retirement plan. These are areas where you can now take your money further.
Looking ahead, now that you may have more clarity about debt relief and the extension of the payment pause, you can better plan for the future and be even more aggressive in meeting money goals.
If you’re eligible for forgiveness, it’s important to update your contact information with your credit servicer, check your mail or email for updated information about your loans, and begin planning a budget that accounts for potentially lower monthly student loan payments early next year.
Know what you owe
Create an overall list of all your student loans, including your loan administrators, outstanding balances, minimum monthly payments, and interest rates. This way you know who to contact for help, e.g. B. to seek forgiveness, apply for reprieve, consolidate, or enroll in an income-based repayment plan.
The last two and a half years have shown us the importance of having an emergency fund at all times, which is why you should start building one as soon as possible if you haven’t already. Make a plan and look for ways you can save a portion of your income each month for the future, especially if you’re not currently paying off your student loans.
Experts generally recommend saving between three and six months on expenses. Note that your monthly budget may have become more expensive recently as inflation is near a four-decade high.
Also look at what your goals are for the next few years. It could be saved for a down payment on a house, saved for your child’s college, or invested for retirement. Whatever it is, you can start putting money into a high-yield savings account or short-term CD now while student loan payments are suspended.
Manage debt from high to low interest rates
Forgiving student loans will likely reduce or eliminate your monthly payments altogether, says Dan Casey, founder of Bridgeriver Advisors, an investment advisory firm.
Use the money that’s freed up on other high-interest debt you hold, like credit cards or personal loans. If you’re financially strong, have a steady income, and want to work off your personal student loans, target the ones with the highest interest rates first. Make sure you forestall financial challenges by calling and requesting a refinance or modification of your personal loans to a lower interest rate.
Start investing in your future
If student debt has affected your ability to save for retirement, use the extra monthly income not spent on student loans to open or contribute to an individual retirement account (IRA), 401(k), or other retirement plan .