Student Loan Forgiveness – What to Do With Extra Money

Everyone is talking about the student loan forgiveness plan. And everyone has an opinion about the merits or demerits of forgiving debt. Regardless of your opinion, for those that will benefit from this gift, it would be great to see them take advantage by further improving their financial well-being.

Student loan forgiveness isn’t the only way people receive unexpected gifts. These financial blessings can take many shapes, including gifts from family or inheritance. But, while the gifts take many different forms, they present the same opportunities and the same lures.

Initial Thoughts Should Lead to Second Thoughts

When people first hear of an unexpected gift, they often think about buying something – a car, improving something – like their kitchen, or taking a trip. These might sound great, but now may not be the best time to splurge.

New cars are in short supply, and used cars are still seeing highly elevated prices. We expect this situation to improve, but it could take some time. Contractors overseeing renovations talk about higher supply costs and a labor shortage. The pandemic saw a significant increase in the demand for home improvements. As more projects are finished, the backlog should get smaller, and the pricing and labor shortages should ease.

Finally, traveling today is beset by the challenges of dealing with flight cancellations, lost luggage, and an uncertainty of what would happen if someone in your party fell ill while abroad.

The lure of doing something with quick gratification is strong. Rather than falling for this trap, there are more productive uses for these dollars.

Pay Down Debt

Beginning in January, millions of borrowers who have not been paying their student loan debt will likely need to restart their payments. The reduced payment amount resulting from the forgiven debt will allow the borrowers to now pay down other debt. Look at your highest-cost debt and consider paying those loans beyond the required payments. For example, if the debt forgiveness saves you $600 per month, send the $600 to pay off other debt, such as credit card debt or car loans.

Increase Monthly Savings

Savings from the reduced student loan payments can be directed to automatic saving plans. Increasing your 401(k) or 403(b) contributions is a great move. If you don’t have either of these options, consider setting up an IRA, Roth IRA, or purchasing Series I Savings Bonds. The latter vehicle requires setting up an online account with the U.S. Treasury. The current yields make them attractive even though there are a few hoops through which you must jump.

My favorite action would be to add to a 529 account. If your college loan expenses decrease, you can redirect the savings to a 529 college savings account. Also, if you plan to attend more college or have a child who may, adding to a 529 can help deal with the costs that will arise down the road. In addition, Indiana residents can qualify for a tax credit of up to $1,000, which will increase to as much as $1,500 next year.

The Timing is Also Good

When you add to retirement accounts or 529s, you are purchasing investments. However, with the stock and bond markets both taking a hit, purchases today are at much lower prices than at the beginning of the year. While we never know when prices will rebound, we do know that in the past, buying at reduced prices has eventually paid off.

Don’t Try to Make a Splash

While it will sound boring to some, paying off loans or adding to your savings are two approaches that can help you now and grow your nest egg for when you need the money later. When you receive an unexpected gift, buying that shiny car or getting the modern kitchen that everyone else seems to have is tempting. My best advice is to use this opportunity to improve your financial picture. Then later, with a lightened debt load and a larger portfolio, it will be easier to afford that magical trip to Tahiti.

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