Forgiven Student Debt Could Reignite Your Portfolio

The financial fate of indebted college grads throughout the nation hangs in the balance while the Biden administration’s plan to erase $400 billion in student loan debt works its way through the United States legal system.

Last August, the administration announced it would pardon $10,000 in debt for borrowers earning $125,000 and under or $250,000 or less for couples. Pell Grant recipients, meanwhile, would be forgiven $20,000.

The Supreme Court is reviewing multiple cases to determine whether or not the President has exceeded his executive authority with the forgiveness program. After the latest hearing on February 28, the verdict remains undecided and could yet go either way, with conservative judge Amy Coney Barret’s vote potentially holding sway over the outcome.

The government has extended COVID-era emergency debt relief which paused loan payments and interest on student loans until this year. According to the Federal Student Aid website, the suspension will remain until 60 days after “the U.S. Department of Education is permitted to implement the debt relief program or the litigation is resolved.”

If the court cannot reach a decision by the end of August, payments are due to resume on August 30.

The stakes are high for the estimated 43.5 million Americans with federal student loan debt. The debt ceiling for student loans in the United States is approaching $1.8 trillion. Although an eye-popping sum, the growth of the debt burden is slowing somewhat.

Year-on-year growth of total student debt last year was a mere 1.37% increase, as opposed to ten years earlier, in 2012, when it ballooned by 9.87%.

Portfolio Boon

With the implementation of this legislation, millions of college grads could take the $10,000 discount from their student debt repayment and use it to kickstart their investment journey. There are several investment pathways forward, and with many decades ahead of them, lots of time to enable them to compound.

Investing in the stock market is a great wealth-builder, but many novice traders are confused about where to start. Some attempt to pick stocks from either high-growth companies or companies that consistently pay high dividends, yet studies show that stock picking has a poor track record and typically yields thinner returns than funds.

Novice investors can instead funnel their capital into mutual funds and ETFs. There are use case scenarios for each, but beginners typically gravitate to ETFs, which have a lower barrier to entry. Unlike mutual funds, ETFs don’t have to cover the cost of hiring pro investors to manage the account and so charge less in fees.

The tax burden on ETFs is also lighter since they passively track a fund and have fewer transactions and, therefore, fewer capital gains tax events.

A range of leading ETFs across multiple sectors has low fees and broad exposure. For large-cap U.S. stocks, these include funds that track the S&P 500 index, like Vanguard’s 500 Index Fund (VOO) and Blackrocks’ iShares Core S&P 500 Fund (IVV).

For overseas markets, there is the iShares Core MSCI Total International Stock ETF (IXUS), which tracks both developed and emerging markets, as well as funds that focus on emerging markets, like the  Schwab Emerging Markets Equity ETF (SCHE).

Seemingly small differences in expense ratio compound over time, so use an ETF fee calculator to compare how different fee rates compound and cost your portfolio in the long run.

Those seeking a more physically tangible asset may instead look to real estate. While $10,000 won’t be enough to apply for a loan, it can serve as a starting point for a downpayment on a mortgage.

The sum could also be invested in real estate investment trusts (REITs). These funds offer exposure to the sector without the trappings of owning a physical home.

Another option is crowdfunding, where investors pool their money into properties they couldn’t have afforded alone. Both REITs and crowdfunding platforms like CrowdStreet or RealtyMogul regularly pay out portions of rental collected on the property, allowing college grads to accrue passive income on their investment.

Millennials and Gen Z, who have lower homeownership rates compared to previous generations, can invest indirectly through these alternative assets and profit from property.

Down to Zero

Regardless of the court’s decision, millions of debtors will soon need to start paying what they owe again for the first time in three years.

Regularizing payments is one way to optimize the process. Borrowers lower the risk of stalling by making payments part of their routine, like the rent or phone bill. To set and forget deductions, sign up for automatic debits with the loan servicer. As a bonus, a lower interest rate is often made available for doing so.

The government also lends a hand in the form of a tax refund. Putting that bit of extra cash toward your debt can whittle it down ahead of time.

Several professions also offer specialized forgiveness programs, including military members, teachers, public servants, and others.

Those who are stuck with multiple debts may find strategies like the “avalanche” or “snowball” methods effective. These offer differing approaches to prioritizing payments so borrowers can pave a pathway and build momentum toward reaching zero debt.

The Biden administration’s plan to lighten the debt burden remains in limbo for now. So long as the bailout makes it through the courts, indebted grads can make the most of the forgiven sum to begin building a brighter financial future.

This post was produced by Top Dollar and syndicated by Wealth of Geeks.