How to use extra money in your budget from student loan forgiveness

“It will be enough for us to start talking realistically about buying a home,” Dara Zucker, 28, said of student loan forgiveness.

Zucker and his fiancé have been looking for a house in Tampa, Florida. They budgeted $250,000 for a 1,400-square-foot home, but between the unpredictable real estate market and her student loan balance of $38,877, “we had to put that on hold.”

If $10,000 of his debt is forgiven, as expected, “I think it will be more realistic,” he said.

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The burden of student loans has been blamed for preventing Americans from buying homes, starting families and saving for retirement.

Now that the Biden administration has paid off hundreds of billions of dollars in education debt and proposed a new income-driven repayment plan that could cut monthly payments on college student loans in half, many borrowers will have monthly payments lower or none.

This “provides borrowers with an opportunity to achieve their goals,” said Jaylon Herbin, policy and outreach manager for the Center for Responsible Lending. That’s particularly true for women and black borrowers, who carry higher balances after graduation, he said.

“Canceling student debt will close that racial wealth gap and give people the opportunity to start a business, have a family and buy that first property or home,” Herbin said.

Considering the average student loan payment, forgiving $10,000 per borrower means “an extra $150 to $300 a month in your budget,” according to Herbin. That opens the door to “go ahead and get wealth and equity,” he said.

The White House also expects the average annual student loan payment to drop by more than $1,000 for current and future borrowers after the new cap on income-based repayment plans.

Consider the milestones you want to achieve in the future.

“For many Americans this will be transformative, for others it will be just a drop in the bucket of what they owe,” said Brian Powell, a sociology professor at Indiana University and co-author of “Who Should Pay?”

Either way, any money that has been freed up can be put to good use, so start with a plan of action, advisers say.

“When you have a plan in place, you’re less likely to throw that money away,” said Rose Niang, director of financial planning at Edelman Financial Engines.

“It’s not just a windfall, it’s an opportunity,” he said. “It’s an opportunity to push yourself to the next level; it’s an opportunity to improve your financial life.”

With the extra cash back in their monthly budget, more than half, or 53%, of borrowers said they would use it to pay off other loans, followed by saving for retirement, investing, buying a home or traveling, according to a CNBC poll. of more than 5,000 adults in August, made online by Momentive.

Here’s what advisers say are the best ways to use that money:

One of the biggest advantages of loan forgiveness is the flexibility to use that money to pay off any other outstanding high-interest loans, particularly expensive credit card balances, added Carter Seuthe, CEO of Credit Summit.

“Since credit card interest rates are often significantly higher than those associated with student loan interest rates, you should pay special attention to this type of high-interest debt,” he said.

Average credit card rates are currently near 18%, which is an all-time high, and could be closer to 20% by the end of the year.

“With interest rates going up, that debt is only going to get more expensive,” Niang said.

“An emergency fund will help avoid debt traps and keep you calm,” Seuthe said.

Transferring money that would previously have been used for your monthly student loan payment into a savings or money market account could go a long way toward building a cushion of cash to reach those long-term goals.

Most financial experts recommend having at least six months of expenses set aside in an emergency fund. However, Niang advises clients to save around 12 months, taking into account rising inflation and a clear slowdown in the economy.

“A looming recession could affect employment,” he said. “If you have a job that’s fairly recession-resistant, then maybe you need three months, if you have a very specific job that’s hit hard by the recession, then definitely having 12 months is what we would recommend.”

If you already have a decent emergency fund, consider your retirement savings.

“If student debt has affected your ability to save for retirement, use the extra monthly income you don’t spend on student loans to open or contribute to an individual retirement account, 401(k), or other retirement savings plan” said Dan Casey, founder of Bridgeriver Advisors in Bloomfield Hills, Michigan.

Try to save 10% of your income for retirement, Casey said. “If you have a business plan, at least you’ll be putting in enough to get the employee match,” she added, which will help you reach that goal.

If you don’t have a retirement account, open a Roth IRA, he advised. Account holders can withdraw their contributions at any time without taxes or penalties if, for example, they want to use the money for a down payment on a house down the road. (There is a maximum IRA contribution limit of $6,000 for 2022.)

Once you’ve paid off the debt and your short-term and long-term savings are in good shape, then “consider putting some of the money you’d use on student loans toward a reward, maybe a trip or something you’ve always wanted.” to buy,” Casey said.

“The stress of having student loans has probably taken its toll,” he said. “Give yourself a small gift.”