Student loan relief finally got the green light, and it couldn’t come at a better time. The federal student loan repayment pause will be lifted in December 2022 and payments will resume in January 2023.
Keeping his campaign promise, President Biden received approval to move forward with targeted student debt relief, providing relief for more than 40 million borrowers and full forgiveness for approximately 20 million. of borrowers. Savings will range from $10,000 to $20,000 in total rebate, depending on eligibility.
For money-conscious people looking to make informed money decisions, this benefit begs the question, “What should I do with all this savings?” Here is our guide.
If you need a more hands-on approach to your finances, a financial advisor can help you create a financial plan to manage your money.
Summary of Student Loan Relief 2022
One of President Biden’s biggest promises in 2020 was to tackle the looming trillion-dollar student debt crisis. Many Americans have long struggled with student loan debt, taking out large sums to fund their post-high school education.
Goals set by the Biden-Harris administration will revise higher education costs. These will include:
Halve undergraduate loan repayments: This will reduce the average annual payment by over $1,000.
Fix the Public Service Loan Relief Program (PSLF): This will allow borrowers who work in non-profit organizations, the military, or branches of government to receive credit for loan forgiveness through the PSLF program.
Protecting future college students through reduced college costs: This proposal includes doubling the maximum Pell grant and offering free community college.
And it all starts with the Department of Education debt cancellation for Pell Grant and non-Pell Grant recipients.
How much you could save
The relief structure is simple. There are two levels of forgiveness: Pell Grant recipients and non-Pell Grant recipients. A Pell Grant is a sum of money provided by the government to low-income students. Unlike a loan, the Pell Grant does not have to be repaid. If you received a Pell grant, it will be listed on your FAFSA award letter.
Pell-Grant recipients are eligible to receive up to $20,000 in debt forgiveness. Non-Pell Grant recipients are eligible to receive up to $10,000 in debt forgiveness. This will not apply to the top 5% earners. Individuals are only eligible if their income is less than $125,000 or $250,000 for married couples.
Where to Apply Your Student Loan Savings
Now that you’ve learned about the student loan relief plan and the savings you’re entitled to, let’s talk about where to apply those savings: outstanding debt and retirement.
Outstanding debt: The average debt per American household is ridiculously high. Even when you write off student loan debt, Americans are still responsible for automobiles, personal loans, and credit cards.
Putting the new student loan savings into other debt relief efforts is a smart move. By eliminating your debt, you could see an increase in your net income that could be directed to an emergency fund, general savings, or retirement.
Below is a chart based on a 2021 study reflecting average debt by type.
Retirement: The other option is to catch up with retirement savings. With high student loan debt and the high cost of homes, millennials and Gen Zers are either postponing their savings for retirement or not saving enough. While it may seem like retirement is a long way off for some 20-somethings, what they really miss is the concept of compound interest that will mean the difference in thousands of dollars when retirement arrives. To find out if you’re on the right track with your savings, use a retirement calculator to see how much you’ll need.
If you haven’t contributed in retirement or aren’t contributing at the required rate, withdrawing excess savings from student loan relief can help you fill the gap.
In numbers: your potential savings
The average American had a student loan repayment of about $400 before the payment break according to the Federal Reserve. That’s an average of $4,800 per year. If you receive $20,000 in savings, that $4,800 is just over four years of contributions. Assuming you’re 30 and plan to retire at 65, let’s see how that will look over 35 years if you choose to contribute to retirement savings with an average return of 5-8% and interest compound annuals.
Now let’s look at the chart below to see what that sum alone will look like if it’s allowed to continue to sit and grow in a 401(k) account for the rest of your working years until you reach the age of 65.
If you were wise and chose to continue contributing the same $400 per month for the remaining 30.84 years until you hit age 65, this is what your total retirement nest egg would look like.
If you have student loans and earn less than $125,000 a year ($250,000 for married couples), you’ll get a $10,000 to $20,000 reduction in student debt. What you do with the savings is up to you, but with Social Security insolvency on the horizon, bolstering your retirement savings can be a smart option for a comfortable retirement.
The decision to retire is one of the most important and difficult decisions many of us will make. A financial advisor can help you determine a timeline and create a plan for the future. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your matching advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
Use our free retirement calculator to assess your progress towards the retirement goals you have set for yourself.
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