Paying down student loans versus adding to retirement

Many people question the best use of expendable income as to whether or not additional payments should be made toward student loan debt or if those extra funds should be allocated toward savings or investments. If you have a reasonable expectation of high returns in the market the question becomes debatable however, if you are paying high interest, have a high balance or have unpredictable cash flow it is more than likely more prudent to try to pay down the student loan debt faster.

Here are some pros and cons for paying down the student loan debt or investing:

If you've used a credit card and applied for loans in the past, you should know how important your credit score can be. If your credit score is too low, it's much more difficult to gain approval for any type of loan. However, good credit isn't just about getting loans or credit cards. It can also significantly impact your investment opportunities. If you have little or no investment experience, you should understand what your credit score means for any future investments you make.

Student Loan Forgiveness Plan

• On August 24, 2022, President Biden announced $10,000 of debt relief per federal student loan borrower for those who did not attend college on Pell Grants. He announced $20,000 for those who did attend college on Pell Grants.
• The loan forgiveness is for individuals making under $125,000 a year and families making under $250,000 a year. Loans must have been taken out by June 30, 2022.
• If you’re a current borrower and a dependent student, you will be eligible for relief based on your parents’ income rather than your own.
• Borrowers for whom the Department of Education does not have accurate income information (the majority of borrowers) will need to apply for loan forgiveness. The application should be available by early October. It will take four to six weeks for the forgiveness to appear in a borrower's loan profile, so the government recommends borrowers apply before November 15 to ensure the relief is applied by the time payments resume in January 2023. Sign up at studentaid.gov to be notified when the application opens.
• Borrowers will be able to apply for student loan forgiveness through December 31, 2023.
• President Biden also extended the pause on student loan repayments that was set to expire on August 31. Payments will begin again in January 2023.
• Something getting less attention than it should: If you made student loan payments during the pandemic pause, you can now receive a refund. Simply contact your loan servicer to begin the refund process.
• Certain states will be taxing your forgiven loan, be sure to let your accountant know that you had a forgiven loan

Proposed Changes to Income-Driven Repayment Plans

The Department of Education has proposed changes to income-driven repayment plans:

• The proposal would cap monthly payments at no more than 5% of your discretionary income, down from 10% now. Remember, discretionary income is the money left after paying taxes and essential cost-of-living expenses.
• Borrowers with undergraduate and graduate loans will pay a weighted average rate.
• The plan would also forgive loan balances after ten years, instead of the usual 20, for those with original balances of $12,000 or less.
• Under this proposal, loan balances will not grow as long as you make your monthly payments, even if you’re not required to make payments.
• If you have worked for a government agency or a nonprofit organization, you may also qualify for the Public Service Loan Forgiveness Program

While there are several individuals in great need of the stimulus payments from the government for others it is a windfall. Likewise, tax refunds can be unexpected bonus income that you are not relying on for your regular expenses. So, what do you do with this money?

Your biggest wealth building tool is your income. If your debt payments leave you with nothing left over at the end of the month, it’s time to get serious about paying off your debt.

Start with a financial inventory of your current assets (savings and retirement accounts, business accounts, home equity) and liabilities (credit cards, student loans, mortgage payments, car payments).