What to do With Student Loan Forgiveness Money

By: Mary Jo Terry, Managing Partner at Yrefy

According to the Education Data Initiative, baby boomers carry the highest average balance of student loan debt per borrower, at $45,136. As the student loan Supreme Court decision is expected to be revealed June 30 and borrowers haven’t had to make payments in over three years, this could mean seniors will be paying back tens of thousands of dollars in just two months. But if student loans are forgiven, for the majority of borrowers who will still have a balance to pay, this could mean they have lower monthly payments or a shorter repayment term. Here’s what you should do in both cases:

Preparation for restarting payments

Verify your loan balances with your lender

Contact your lender and verify that the loan data they have for you is correct and matches your records. After years of monthly payments, many of us have likely set up an automatic payment process and may not be keeping a close eye on our student loan debt. Without having to input our payment information each month ourselves for years, the current balance could be lower than expected. Knowing the current balance is crucial to understand what you have left that you owe and is the next step in understanding what monthly payments you need to be making to pay off student loans quicker. You may even surprise yourself and already be paying more than the minimum each month.

Calculate your repayment responsibility and budget your repayment properly

Make sure your current repayment plan will fit with your budget, especially if you are on a fixed income (such as after retirement). Student loan payments are a monthly payment, they should constantly be factored into your budget. Whether you owe a hundred dollars each month, or even a couple hundred. Especially if your income has recently changed or you’ve retired in the past few years. Whether you’ve been paying the minimum, or even a little more, if your finances have changed even the slightest bit, it’s important to calculate how much you can pay each month towards your student loans. You may be able to make a higher monthly payment than you did when you first took out the loan. 

If needed, get into the right IBR program

The federal government has a myriad of Income Based Repayment (IBR) plans or programs available to help borrowers of all financial backgrounds.These programs will look at your income and decide what an appropriate student loan payment would be each month. They’re beneficial for borrowers with a large amount of debt, that acquire a low monthly income (such as during retirement). After 25 years in an IBR program, your remaining student loan debt is forgiven. Typically, when you apply and are accepted to an IBR program, your payments will be very little, and in some cases, you could even owe nothing each month. However, if you get into an IBR program, it will likely take longer for you to pay off your student loans and you could be paying more on the loan over time. Consider first what other options you have before applying for these programs.

What to do if you have lower monthly payments/shorter repayment terms if forgiveness happens

Pay off your mortgage

Depending on how long you’ve been living in your current home, your remaining balance on your home might be small enough for you to pay off in a single lump sum or make higher payments each month to pay off the loan quicker. Without having a mortgage to worry about, you can free up more funds down the road for other activities and opportunities and give you peace of mind that you’ll always have a roof over your head.

Delay Social Security payments

While it might seem like a great idea to get more cash quick, delaying receiving these benefits will actually mean the amount increases each month you delay taking them beyond retirement age. This means that when you do begin taking them, you could get a much larger monthly check. If you find yourself to be a chronic spender because of some extra money, this can be especially helpful for you. By not taking the money yet, you can prevent yourself from spending it so that you’ll have it on hand when/if you really do need it. Re-evaluate your budget with your extra monthly income on hand to see if you can delay receiving social security benefits until later down the road.

Pay off your remaining debts

While you might be in the habit now of making the minimum payment on other debts each month, having extra cash to spend (or save) each month, can allow you to make bigger monthly payments and finally pay off other debts. Paying off debt with a fixed interest rate should be a priority that comes later. Pay off debts with a variable interest rate first. This can help get your budget under control and save you more money in the long run. It’s also a good idea to pay off some of your smallest debts first to completely rid them of your monthly expenses, this way you no longer have to make room for them in your budget and that money can go towards another, bigger debt that you need to pay off, or towards necessities.