Ask An Expert: I Got Public Service Loan Forgiveness, Now What?
The past few months have brought some pretty eye-catching trends and headlines where our collective finances are concerned. These days, you can’t go far without bumping into one hot-button issue near and dear to many of us: student loan forgiveness. Earlier in the year, the US Department of Education released Public Service Forgiveness Loan numbers that revealed that 70,000 borrowers qualified for nearly $5 billion in student loan relief, and further estimates projected that as many as 550,000 people could benefit, all told. If you qualified and had your loans forgiven, it might be tempting to run out and spend that wad of money (hey, a splurge here or there could be in order) but if you’re looking to be smart with your money, my conversation with Mark Reyes, senior financial advice manager of Albert, a financial services technology company could be useful to you, as he has a few great suggestions.
Reyes says that less than 5% who qualified and applied have received student loan forgiveness and for them to get that, there were criteria that needed to happen to stay in good standing. “ The benefit is designed [for people working in] jobs that don’t have high incomes and they’re making an impact,” he says. “Loan forgiveness helps relieve them of the economic burden of their student loans.”
Mindfulness about the foundation to loan forgiveness is crucial. First and foremost, you need to stay qualified for that forgiveness. It’s important to remember that the landscape for personal student loan forgiveness has changed a lot over the past few years, according to Reyes. What this means is that you will need to stay apprised and make sure that you are fully aware of what needs to be done to qualify and eventually receive that loan forgiveness. Typically, this includes re-certifying, providing the correct documentation, and making consistent payments while waiting on your loan forgiveness.
Here are a few more tips:
GW: Should borrowers do anything tax wise?
MR: Yes. If you receive student loan forgiveness, make sure to get a clear picture that provides specific understanding of any and all tax liabilities you may be responsible for. Keep in mind that under the American Rescue Act of 2021, the amount of student debt that is forgiven won’t be taxed on a federal level until the end of 2025, but some states may still count it as taxable income. If you plan to receive forgiveness after 2025, stay alert for any changes on how forgiveness will be treated by the IRS and prepare for that.
GW: Tell us about paying off any toxic debts.
MR: What is toxic debt? Also known as toxic loans or bad loans, toxic debt has less chance of being paid back to a lender. If you have high interest credit card debt or other forms of toxic debt like a payday loan, it’s time to detox by making it a priority to pay those debts off as soon as possible. Toxic debt is very expensive to keep, and can limit you from achieving greater financial goals.
GW: What can people do about their emergency fund planning?
MR: It’s important to start prioritizing financial wellness and having an emergency fund saved up consisting of 3-6 months worth of non-discretionary expenses is a pillar of just that. One easy way to execute this task is by automating your savings, so that a percentage of your paycheck gets automatically deposited into a savings account. I highly recommend this.
GW: Many people shy away from budgeting. Got any advice?
MR: Budget doesn’t have to be a dirty word. In fact, a healthy budget is the backbone of financial wellness, according to Reyes. If you’re not sure where to begin, it’s probably best to keep it super simple. Reyes typically recommends what’s called a “50/20/30 budget.” This is where 50% goes towards essential spending such as rent, insurance, essentials, and food, 20% goes towards savings and investing, while 30% goes towards whatever else you desire.
GW: So can we call that 30% the You Only Live Once (YOLO) bucket? How much YOLO can we do?
MR: That YOLO bucket is crucial for your life enjoyment. It’s for whatever you want. If you stay within 30% it doesn’t matter what you do with it as long as you can stick with that 30%. You don’t have to YOLO every night. You can YOLO some.
GW: What about retirement investing?
MR: Paying yourself first is crucial and so is paying your future self. Retirement, that far off light at the proverbial end of the tunnel, will come knocking sooner than most of us think, and the news about the finances surrounding our collective retirement outlook isn’t always stellar. Once you have a healthy financial base (no toxic debt, strong emergency fund, room leftover in your budget/ not overspending) start investing for retirement. Generally speaking, a good goal is to contribute 10-15% of your income, but if you can max out your retirement account, [that’s] better.
GW: Thank you for your time.