Financial advisers rarely recommend not paying off debt, but this time is different.
Since President Joe Biden was elected, millions of Americans with student loan debt have waited for him to fulfill a campaign promise of forgiving at least $10,000 per borrower. While Biden recently extended the payment moratorium for the loans until Aug. 31, pressure is mounting on the administration as the midterm elections approach.
With the White House ponders its options, questions are swirling on how debt cancellation would actually work: Would people making more than six figures annually qualify for forgiveness? When will it take effect? Will $10,000 be forgiven, or $50,000 as some Democrats are pushing for?
For personal finance experts, one thing is clear: There’s no reason to pay right now.
“It’s been a roller coaster for a while,” said Richard Cooke, financial planner at 2Point0 Financial in Indiana. “I have a handful of clients who have the funds available to pay off their student loans, but we’re waiting until we have a clear message from the administration before making a final decision.”
The wait-and-see approach can be frustrating for borrowers eager to rid themselves of the debt burden. And it’s worth noting that forgiveness would only apply to federal student loans. Payments on private loans haven’t been paused, although some are still offering temporary deferment or modified payment plans.
Advisers say there are ways to prepare for a future with student loan forgiveness, while also hedging your bets.
Pay Yourself
Many borrowers are using the money they would’ve spent on federal student loan payments to reduce other debt like car loans, credit card obligations and paying private student loans.
But say you’ve already tackled that and are now eyeing your federal student loans. Instead of paying down the principal right now, some advisors recommend putting that cash into a high-yield savings account.
“I'm encouraging clients with federal student loans to make the payments to themselves for the time being until we see how all this unfolds,” said Kyle Hill, owner of Hill-Top Financial Planning in Kansas City, Missouri.
Money set aside for debt payments can be an extra cushion for an emergency fund, and help teach clients good habits for saving, according to Diane Pearson at Pearson Financial Planning in Wexford, Pennsylvania.
The downside, of course, is that the value of cash is deteriorating because of surging inflation.
Set a Time Limit
Some advisors are working with clients to set a date when they’ll start putting the money toward the loans, regardless of what happens in Washington, D.C.
For Cooke, if an announcement isn’t made by the end of this forbearance period in August, it’ll be time to stop waiting and start paying.
Having a personal deadline can help borrowers avoid feeling like they’re living in limbo, with student debt hanging over them. For others, getting rid of the debt is mentally freeing, so it’s worth paying now, even if forgiveness is coming.
“Some clients are really gung-ho about being debt-free and for those clients, we just fully tackle all of their loans regardless of the political state,” said Nathan Bender, lead planner at Black Bishop Financial Group.
Minimize Your Income
Some advisors are telling clients to prepare for income-based loan forgiveness.
Chris Diodato, founder of WELLth Financial Planning in Palm Beach Gardens, Florida, is telling clients to reduce their gross adjusted income, so they have a better chance of qualifying for potential federal forgiveness programs.
Strategies for this include maxing out pre-tax contributions to employer retirement plans, and putting as much money as possible into health savings and flexible spending accounts.
For business owners and independent contractors, paying for future expenses this year could also be a wise move. This is similar to the advice he gave in 2020 for clients to qualify for stimulus checks, he said.
“The moratoriums are the Biden administration kicking the can until he has enough support in Congress to pass some sort of much more comprehensive reform,” Diodato said. “I don't know if it will be a full forgiveness package or a certain amount, but if there are going to be income caps, they're probably going to go off previous years’ tax returns.”
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