President Joe Biden announced his student loan relief program August 24. Now, financial advisors are helping clients understand the mechanics and, for clients who qualify, suggesting how to best allocate that extra money in their pockets.
“It's providing a lot of my clients breathing room on a month-to-month basis,” said Jeff Lewis, a financial advisor at Savant Wealth Management.
Under the plan, the U.S. Department of Education will forgive student-loan debt of as much as $10,000 to individuals without Pell Grants and as much as $20,000 to those with Pell Grants, the U.S. government’s Federal Student Aid website states.
The plan applies only to federally funded loans, not private ones, and there are income limits: $125,000 or less for individuals and $250,000 or less for couples.
For those who fit the profile, one key component is a proposed reduction to the borrower’s monthly payment obligation. That figure would drop to a maximum of 5% of discretionary income for undergraduate loans, down from the prior maximum of 10%.
The monthly payment cap slash is top of mind for his clients, he says.
He compares a $2,000 monthly payment to a $1,000 one.
“What are you going to do with that additional $1,000? Are you going to save it for a house? Are you saving it for retirement?” he posits. “Are you saving it for an engagement ring for a potential future spouse? … Those are the types of conversations that I've been having with a lot of my clients.”
“I think the ultimate goal was to help those who are drowning in debt that can't afford to accomplish these other goals,” Mello said. “You know, typically, the younger generations, millennials are delaying their first home-buying experience because they are strapped with this debt. So, if we alleviate some of that, it allows that monthly cash flow to be freed up to use for other things.”
Rose Niang, a director of Financial Planning for Edelman Financial Engines, a Santa Clara, California-based firm with $241 billion under management, is having similar conversations about the program with clients who are wondering about “the best way to leverage” the extra funds to help them work toward their goals.
Niang says she recommends a few different options, including maxing out their 401(k) contributions.
“The second thing is maybe pay off debt that you have, because that is just going to get more expensive as interest rates increase, as we've seen them do,” she said, mentioning building an emergency fund as a third option.
The conversation around this program is still evolving, Niang noted, and she’s pointing clients to the Department of Education website for continual updates.
According to the website, debt-forgiveness applications must be received by December 31, 2023. Expediency is important, since the loan-payment pause is scheduled to expire at the end of this year, at which time students will likely resume making regular loan payments.
And though the loan forgiveness is big news right now, Mello reminds clients that this is a one-time forgiveness plans, as of now. "And it is not something that we are advising clients to expect in the future or change behavior around when planning for college,” she said.
“So regardless of this debt-relief announcement, I still think it's important to remain practical and not assume that you should be living outside of your means because you're potentially expecting this to occur again,” Mello added.