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.