Since the beginning of the pandemic, the government has put a freeze on student loan payments and charging additional interest on student loan balances, which has helped many people stabilize their finances a bit. But this week’s announcement of a new student loan plan could help many of those families get a big step closer to a more stable financial picture. “This is a huge first step,” says Stefanie O’Connell Rodriguez, host of Real Simple’s Money Confidential podcast. “This enables money for a down payment on the house, it enables people to take risks, start businesses, have families.” And it could be a big step forward for you, if you are currently in the process of paying off federal student loans.
New student loan rules 101
The student loan plan is still taking shape and may be subject to some changes over the next few months, but here’s what was proposed this week. Keep in mind that these only apply to federal student loans—private loans are not subject to these new rules. And if you’ve made any payments on your student loans between March 2020 and now that brought you below the $10,000 or $20,000 level, you can get those payments refunded to you. “Some current and most future borrowers will greatly benefit from the changes to interest accrual,” says Lauren Anastasio, CFP and director of financial advice at Stash. “Stories of interest accrual outpacing payments and responsible borrowers watching their debt grow, despite disciplined on-time payments, should be a thing of the past. This will ultimately make the prospect of borrowing less daunting.” But what should you do first if you’re benefiting from the new rules? Here’s what financial experts recommend.
Hold off a bit on making any big changes
While the news may have you trolling Zillow for your first house or shopping for a new EV, but it may be best to err on the side of caution for the moment. “It’s not totally clear exactly what the impact is, since it’s likely to be legally challenged,” O’Connell Rodriguez says. “I wouldn’t spend the money before I saw it reflected in my account balance.” You’ll definitely want to watch for news on the progress of this plan. “For most borrowers, the forgiveness will not be automatic, so you may still need to keep tabs on when an application process becomes available and apply for the forgiveness.
Create (or boost) your emergency fund
With a recession potentially on the horizon, it pays to have money saved in reserve—at least enough to cover three to six months of expenses. “You can pad your emergency savings while you wait and see what happens with the student loans,” O’Connell Rodriguez says.
Pay off high-interest debt
If you’re no longer saddled with federal student loan debt, it’s time to focus on any other high-interest loans you’ve taken on, such as credit card debt or private student loans. If your private student loans are still an issue, consider giving your lender a call. “The best action is to be proactive,” O’Connell Rodriguez says. “If your debt payments are more than you can afford, call your lender and try to negotiation with them. It’s always worth a conversation, even if you aren’t successful.”
Start (or boost) your investing
“If you were spending $300, $800, $1200 on student loan payments and you already built that into your budget, don’t take that line item out of the budget,” O’Connell Rodriguez says. “Redirect that line item to continue building wealth.” Your 401K or IRA is the optimal place to put that money, to help you shore up your retirement.
Start saving for milestone goals
If marriage, a new house, a new baby, or another big milestone is in your future, the student loan forgiveness could speed up your timeline for your big life goals.
