Under President Joe Biden, more than 638,000 borrowers have had their student loan debt canceled or are in the process of having their student loans canceled, NPR reported. If you fall into this category, you may now have some extra wiggle room in your budget, so what should you do with those extra funds? I spoke to financial experts to get their best advice.
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Cover all necessary expenses
“To prioritize these additional funds, take a look at necessities, such as housing, groceries, transportation and education,” said Stacey MacPhetres, student loans expert and senior director of education finance at EdAssist Solutions. “Recognize how much extra money in your pocket can improve you and your family. “
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Pay off other debts
If you have credit card or other non-mortgage debt, focus on paying off the funds you previously spent on student loan payments.
“For those whose personal balance is biased toward liabilities, we would advocate continuing to pay off debt and resizing their personal accounts with the new debt relief,” said Adam Green, co-founder and CEO of Yeildx.
Focus on paying off high-interest debt first, said Katie Ross, executive vice president of American Consumer Credit Counseling.
“For those who now have more wiggle room in their budget, it may be a good idea to tackle high interest credit card debt, especially for those who have been over budget with holiday shopping. and who will receive their credit card bills which may be larger than expected, ”she said. “The average credit card interest rate is almost 20%, so for consumers who don’t pay their entire bill each month, this debt can add up quickly. “
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Even if you don’t have holiday shopping debt, you may still be in debt after a few tough years.
“Recent data from Tally, the debt repayment app, revealed that more than half of people with credit card debt increased this debt during the pandemic,” said Bobbi Rebell, CFP and personal finance expert. at Tally’s. “Any student debt relief is an opportunity to take control of credit card debt if that’s you. “
As for which credit card to pay off first, “start with your highest interest rate through your lowest interest rate,” said John Rampton, founder of Due.
Paying off debt can help you avoid a financial crisis and give you more financial flexibility, said Julie Rains, writer and editor at Investing to Thrive.
“The fewer obligations you have with your finances and the more money you have, the more you can avoid problems – like not having enough money or credit to pay for an unforeseen medical expense or a large car repair bill.” – and take advantage of opportunities, such as posting a deposit for a new apartment so that you can take on a new job in a new city, ”she said.
“Specifically, if you have high interest credit card debt, loans with a small balance, and student loans with no interest, it makes sense to prioritize debt payments and speed up those repayments. “Rains continued. “Then once your debt is eliminated, you will have funds to save and invest. “
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Set up an emergency fund
Once you’ve paid off your non-mortgage debt, your next priority should be your emergency savings, said Barbara Friedberg, investment expert and owner of Robo-advisor Pros and Barbara Friedberg Personal Finance.
“Set up an emergency fund equal to six months of living expenses,” she said. “COVID should remind you why this is important! “
Having six months of spending saved in an emergency fund “does two things,” said Derek Sall, owner and blogger of Life And My Finances. “It gives you security in an emergency and will prevent you from making stupid decisions on any given day because you never have any money. “
If six months seems too ambitious a goal, start with $ 1,000.
“Save it as fast as you can,” said George Kamel, a Ramsey personality. “It will help you if something unexpected happens. “
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Saving for retirement
If you’ve paid off your debts and have enough emergency funds, focus on long-term savings.
“Allocate more to your ‘endgame’,” said Nicole Lapin, money expert and author of “Miss Independent: A Simple 12-Step Plan to Start Investing and Grow Your Own Wealth”. “The end of the game is where you put money into things your future will thank you for, like savings, investments, and retirement. “
“Fund your 401 (k) or 403 (b) workplace with as much money as you can,” Friedberg added. “If that’s not available, open an IRA with a robo-advisor. The best beginner robot advisers offer low minimums, financial advisors, and easy setup.
Katelyn Murray, CFP, financial planner and relationship manager at Kendall Capital, recommends putting the extra funds into a Roth IRA.
“As long as you currently have earned income, you can open a Roth IRA and save the lesser of 100% of your earned income or $ 6,000 ($ 7,000 if you’re over 50) year to year. other. Since you are saving in a Roth IRA, these funds are considered “after-tax” retirement savings, which means you can extract all capital and income 100% tax-free once you have over 59 and a half.
While you may not yet feel the need to prioritize saving for retirement, getting started early is essential.
“The money set aside now will have more time to grow,” Rains said.
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Make investments to fight inflation
“To combat the current rate of inflation, I would focus on investing in TIPS or I-Bonds which currently pay 7.12%,” said Bob Lotich, certified personal finance educator and founder of SeedTime. com.
You should aim to invest the amount you previously owed in your monthly student loan payments.
“Take the exact amount you used to pay off your student debt and keep making those payments every year, except in an investment vehicle that takes advantage of the principle of compound returns,” said Bobby Matson, CEO of Payitoff. “Here are some basic calculations. If your student loan payment was $ 400, if you were to just invest the same amount of money, every month, in the stock market (say the S&P 500), in 30 years you will have a portfolio worth 1 $ 121,808 (if you continue to reinvest your earnings, and the market continues to perform similarly over the next 30 years as over the past 100). That’s a pretty powerful thing to grab hold of – $ 400 a month ultimately makes you a millionaire. Since you weren’t expecting your debt to be canceled, you might as well pretend it isn’t and keep making those monthly payments, except instead of paying them to a lender, pay them off. yourself.
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Gabrielle Olya contributed reporting for this article.
This article originally appeared on GOBankingRates.com: If Your Student Loans Have Been Canceled, Here’s What You Should Do Next