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If you have student loans, I’m sure you’ve seen the headlines regarding the possibility of student loans being forgiven under the Biden Administration. Many people are hopeful that this will ease the financial burden that many Millennials and Gen Zers are facing.
Per the Senate vote last week that have included that if student loan forgiveness is granted between Dec 31, 2020 – Jan 1, 2026 taxes on the forgiven amount will not have to be paid.
Although this is good news, it also means that it may be a few years before forgiveness is granted. Below are circumstances where it may not be advantageous to plan your finances around potential forgiveness.
1. If you owe more than $10,000
Biden has already said that forgiving more than $10,000 per borrower is highly unlikely. If you owe more than this amount it’s a good idea to plan for the worst case scenario. The best case scenario being that $50,000 is forgiven and the worst case scenario being that none is forgiven. If you have deferred making payments during the moratorium, have a plan for when it is lifted in September. This could done by change your payment plan and reducing your payments based on your current income or putting money away for future payments right now. Now is also a great opportunity to make payments so that you owe less in interest over the life of your loan.
2. If your student loans make up a big chunk of your credit portfolio
If you don’t have a lot of other forms of credit your student loans may be a big indicator of how you make payments to lenders. Although you are not penalized for not making payments during forbearance given the moratorium it may not be a positive indicator to lenders.
If you are not planning on seeking additional credit in the near future, it’s not a big deal. However, it may be something to consider if you are looking to make some big purchases on credit soon. Think about it – Let’s say you were a real estate investor and you had the option to take advantage of the mortgage moratorium. Would you take advantage of it?
If you are in the process of building your portfolio the answer would probably be no since this would not look good to lenders when applying for another mortgage.
However, if you aren’t in a growth stage and are looking to maintain what you currently have – taking advantage of the forbearance may not be a bad option.
If you are in a position where your student loans make up a big chunk of your credit history, it’s probably not a bad idea to get a credit card. This will help you build more credit that will positively impact your score in the long run.
Things to keep in mind
Student Loan debt is not yet promised
It’s important to recognize that even though there is a lot of buzz about student loan forgiveness it is something that is being considered and not promised. Many people across the country are still very divided on whether it is a good idea for the government to forgive student loans. Less than half of Americans support student loan forgiveness.
Have a Plan – for both scenarios
If you have decided to take advantage of the forbearance until September, have a plan on how you will be paying once the moratorium is lifted. If you are in a position to do so, set aside the payment you would have made into a savings account to either pay right before the moratorium is lifted or to use to make monthly payments after.
If your loans are forgiven and you all of a sudden have some extra cash every month plan for how you will use it. If you don’t plan you will probably spend it on stupid stuff. Can you start saving more for a long term goal, investments, retirement, or child care? Think about it!
If your student loans were forgiven how would it change your finances? Would you be in a better position to reach your goals or is it a small blip on your radar?
Disclaimer: The content in this post is my opinion and should not be considered financial advice. I am not a financial expert or advisor. This content is for informational and educational purposes. For more details please visit the Disclaimer Page.
