Student Loan Forgiveness And How To Balance Debt Against Your Other Financial Goals

Key Takeaways

• Biden has canceled student loan debt for millions and extends loan payment pause.
• Borrowers should consider the loan’s interest rate, minimum payment, and their retirement account’s compound interest rate when deciding whether to fund their student loan repayment alongside saving for retirement.
• Financial goals extend beyond paying off student loans. Individuals should also ensure they have a solid credit score, a defined budget, and strategic investment portfolios.

How likely will your student loans be forgiven?

During remarks he made at Joint Base Andrews at the end of July, President Biden stated he would announce his decision about student loan forgiveness at the end of August, having already discharged nearly $32 billion in student loans since the start of his presidency.

Just last week, the Department of Education stepped in and canceled $3.9 billion worth of student loans for those who attended ITT Technical Institute. According to U.S. Secretary of Education Miguel Cardona, “ITT’s leaders intentionally misled students about the quality of their programs in order to profit off federal student loan programs, with no regard for the hardship this would cause.”

ITT’s student loan forgiveness gives some borrowers hope that their loans will also be forgiven. But whether your loan is erased or not, there are financial goals you should be planning for, with or without balancing the burden of student loan payments.

How can you determine if your loan will be forgiven?

It’s essential to understand the terminology used when discussing student loans. Forgiveness, cancellation, and discharge are similar terms, but they are used differently:

Forgiveness/cancellation: When a person’s job relinquishes them the responsibility of paying their student loans.

Discharge: When another factor, like a school closure or disability, absolves an individual from having to pay off their loans.

Current forgiveness programs

It’s important to note there are particular eligibility requirements for these programs, and not everyone may qualify.

• Public Service Loan Forgiveness is for government or non-profit employees.
• Teacher Loan Forgiveness is specific to teachers who taught for at least five years in a low-income school. This program may remove up to $17,500 off of their loans.
• Closed School Discharge is for students whose school closes midway through their education or shortly after their withdrawal from the institution.
• Perkins Loan Cancellation and Discharge is for borrowers who took out Perkins Loans, which were for students in significant financial need.
• Total and Permanent Disability Discharge for those individuals who are totally and permanently disabled.
• Discharge Due to Death is for those who die before paying off their loans.
• Discharge in Bankruptcy is for individuals who declare bankruptcy.

Will I have to start making payments soon?

Former president Donald Trump paused student loan payments on March 13, 2020, due to the COVID-19 pandemic. President Biden continued this pause when he began his presidency, and just extended it for the seventh time.

The devil is always in the details, but the broad strokes that we do have outline that federal student loan borrowers who earned up to $125,000 of annual income (or $250,000 as a joint filer) during the Covid-19 pandemic will qualify for substantial student loan forgiveness.

Should I fund my retirement account or pay my student loan?

There are some factors to consider before choosing whether to fund your retirement account while paying off your student loan.

Interest rate

If the interest rate on your student loan is high, you will want to pay as much money as possible towards the loan to pay it off quickly. Every month you carry that loan, you take on additional costs from the loan interest.

Conversely, if you have a low-interest rate loan, you may be able to stratify your funds towards saving for retirement and paying off the loan.

Compound interest

Compound interest, or interest on interest, can help quickly grow a retirement account. Thus, the earlier you start saving for retirement by taking advantage of compound interest, the more financially secure you’ll be later.

You don’t want to miss out on the benefits of compound interest by getting hyper-focused on paying off a student loan unless the loan interest rate is so high you will lose more money in the long run than you gain saving for retirement.

Minimum payment

Make sure you know the minimum payment on your student loan and pay at least that amount each month, so you don’t default.

Depending on the interest rate of your loan and the interest rate on your retirement account, you might have to ask yourself if it makes sense to pay the minimum student loan payment to max out retirement. Alternatively, you may pay your student loan off as quickly as possible and not direct as many funds towards retirement.

Life goes on after student loans.

While paying off student loans may feel arduous, you do have a life beyond this debt. Regardless of whether or not your student loan will be forgiven, you should have an entire set of financial goals to consider in conjunction with paying off your student loans.

Three priorities for individuals with student loan debt

Here are three factors to prioritize to ensure your financial position stays on track while repaying loans.

Credit score

Ensuring you have a strong credit score will help you have the most financial opportunity in the future. A credit score ties to your likelihood of being approved for other loans, rental properties, and credit cards. Your credit score stability can determine the rates you pay on those loans and credit cards. Typically, the better the credit score, the lower the rate.

You can ensure your credit score is solid by paying off loan payments and credit cards on time, each time they are due, without fail.

Budget

Your income must be higher than your expenses to have money to save. But with inflation hitting a 40-year high earlier this year, you probably feel like your money isn’t covering costs like it used to.

When making a budget, consider the following elements:

• Your income after taxes.
• How much money you spend each month on expenses, including mortgage or rent, utilities, loan payments, food, gas, and any other necessities.
• How much you spend on extraneous things like entertainment and dining out.
• How much you want to put aside for saving and investing.

If all of those expenses exceed your income, you must cut out some discretionary extras so you have money to put towards upcoming student loan payments.

Invest

Investing isn’t a one-time event but a habit you must frequently do to see positive, consistent results. Make sure you’re putting aside money each month for investing. Take the time to do your investment homework, ensuring you put your funds in strategic securities.

Q.ai has a variety of investment kits that helps take some of the guesswork out of investing. With portfolios consisting of anywhere from 5 – 20 different stocks, bonds, ETFs, and other assets, Q.ai has developed a virtual platform that enables the everyday individual access to diversified portfolios only the elite formerly had access to. Q.ai also boasts Portfolio Protection, which utilizes AI to predict and adjust for potential risks.

Good footing

By ensuring a solid credit score, developing a defined budget, and creating a strategic investing practice, individuals can achieve their financial goals while also paying off their student loan debt.

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