The Personal Finance Podcast - Here's What to Do if Your Student Loans Have been Forgiven

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Starting point is 00:01:38 if your student loan debt has been canceled. If you have any questions, hit me up on Instagram or TikTok for a bunch of new content at Master Money Co. And follow us on Spotify, Apple Podcast, or whatever podcast player you love listening to this podcast to. And if you want to hop out the show, leave a five-star rating and review on Apple Podcasts or Spotify.

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Starting point is 00:02:49 going to be talking about a big announcement that just came out last week. And the big announcement is that your student loan debt has been canceled for a number of people. We're going to talk about who qualifies for that. We're going to talk about some of the rules behind that. In addition, what you should be doing with those extra dollars if your student loan was canceled. Now, let me tell you what we're not going to talk about today. That's the first thing I want to say here. We are not going to talk about the political side of this.

Starting point is 00:03:12 I am in no interest in talking about things that you cannot control. I have zero interest in that. So if that interests you, I personally think that's a complete waste of time to watch the news and focus on politics for things that you cannot control. Sure, you should vote. Sure, you should put your time and energy into something that you can control. But if you can't control it, it is what it is. Here we are.

Starting point is 00:03:33 Listen, I am all for something that is going to help people build more wealth. That is what our entire mission at Master Money is. We paid off my wife's student loans. We paid off other people's student loans. But if it's going to help other people, which is our entire goal here, that is what we get happy about. That's what we get excited about here at Master Money. The other thing we're not going to talk about here is how this will impact inflation. because I am not a fortune teller.

Starting point is 00:03:55 I'm not a person who's going to try to figure out how this is going to impact inflation. Instead, I'm going to see what happens and then react based on that. Because trying to predict what's going to happen with inflation does not help you in your personal finances whatsoever. So focusing on these pittly things that do not matter that stress you out in life and make you more anxious when you cannot control them is a waste of time. So what we're going to do is we're going to focus on things that we can control. Because focusing on the things you can control is how you get ahead. with your wealth. It's how you build wealth and how you move forward over time. Because those people, there's people who sit around and watch the news all day and those people will never get anywhere.

Starting point is 00:04:32 The reason why is because they're just worried about stuff that doesn't matter. Do not be that person. And if you could tell, we feel very strongly about this. Watching the news 99% of the time is a waste of time. Instead, focus your time, your energy on being with your family, building wealth, putting your time and energy towards things that bring you value. The news brings nobody value, Unless it's like a relaxing thing for you to watch stressful things happen, the news brings nobody value. So wasting your time on that is not going to help. Now here's what we're going to talk about. The actions that you should take if this impacts you.

Starting point is 00:05:06 We're going to talk about who this applies to, where you should apply if it does apply to you. And in addition, we're going to talk about what to do next with your money. Because these are the things that you can focus on that you can control. Now, because these are some of the things that you can control, in addition, even if you're against this policy, but you qualify, you need to take advantage of it. The reason why is this is going to help you get ahead with your finances. Now, on the back end, what will happen? I don't know. But on the front end, you need to take advantage of this now so that you can get some of this relief from your finances. So what are the details here? The details are that if you make as a single person under $125,000, you qualify

Starting point is 00:05:45 for a $10,000 student loan, federal loan relief. What do I mean by that? So if you make a $125,000, So if you make under 125 grand per year and you have a federal student loan, meaning a government student loan, then you can qualify to get $10,000 knocked off your student loan balance. In addition, if you're married and you make $250,000 or less, then you also qualify to get up to $20,000 knocked off your student loan balances, $10,000 for each person in your household. Now, if you went to college on Pell Grants, then you can get $20,000 knocked off your student loans. And another big announcement, and we've talked about this in the past before, is the student loan pause is extended one final time through December 31st.

Starting point is 00:06:28 So one thing to note about that student loan pause, and you've heard this talk about this on a money Q&A in the past. But the student loan pause is something where it's an advantage for you to start to pay down during that student loan pause, especially now that this has been announced where who is going to get this relief? Because if you start paying down the rest of your balance, if you have more than $10,000, you're not paying interest on that money. And so you're going to be able to pay it down so much for,

Starting point is 00:06:49 faster just by going after it and getting aggressive on this. That's what I would do personally, especially if your interest rate is very high. Now, if your interest rate is low and most likely, if you have a federal loan, your interest rate is not outrageous, then you just want to make the minimum payments and move on about your business and invest those extra dollars because you come out ahead mathematically on that low interest debt. Now, another thing that changed is payment based on income. It used to be 10% and they lowered the undergraduate loan cap on repayment.

Starting point is 00:07:17 So if you are repaying this back at a 10% rate at the minimum, now it's going to be at 5% of your monthly income. So whatever your monthly income is, you can cap your repayment at 5%. So that is another benefit to a lot of people because it was cut down from 10%. Now, as we look at who qualifies, how do they figure out your income? Is it your 2022 income? Is it 2021? What is it?

Starting point is 00:07:39 So eligibility is going to be based on your adjusted gross income from either 2020 or 2021. those are going to tell you what you were eligible for. So 2022 income is not going to be used for this student loan forgiveness. They're going to be using last years and a year prior. And if you received a Pell Grant and meet those income requirements, you could also qualify for an extra $10,000 in cancellation. And then one other thing to note here is that loans obtained after June 30th are not eligible for this relief.

Starting point is 00:08:10 So on this episode, I'm going to go through a bunch of like Q&As as well, like a bunch of quick question and answers. because I'm getting a lot of questions on this, and so we'll go through a couple of those as well as we go through this. Now, if you did not finish your degree, does this disqualify you? No. So even if you didn't finish your degree, it does not disqualify you from being eligible as long as you meet the other requirements.

Starting point is 00:08:31 So that is who qualifies. If you make less than $125,000 a year if you're single or less than $250,000 a year if you're married filing jointly, then you should be interested in this to take advantage of this. Now, next, we're going to talk about where you can apply, and in addition, what's going to happen to your payments and all those other things. So where can you apply? So the first place you're going to go is if you need to apply, you're going to go to studentaid.gov. But a lot of people are going to have this happen to them automatically.

Starting point is 00:08:59 Because if you're enrolled in some kind of income-driven repayment plan, then most likely the Department of Education already has your income requirement. So if that is you, and they already have your income requirements, what's just saying about 8 to 9 million people, they already have these income requirements. requirements and know how much income they made last year. So if you fall into that bucket, it's going to automatically happen where it's going to be taken off automatically. Now, if you don't fall into that bucket, what you're going to have to do is fill out an application coming up in the next couple of months. And when you fill out that application, what you want to do is make sure you give them all the information, make sure you qualify, so that you can get to that point where you are approved. Now, it's not going to happen super fast where the application

Starting point is 00:09:40 is going to come out. It sounds like a lot of people are thinking that the application may come out within a month or two, so it could be as late as November when it comes out, but that obviously the announcement will be all over the place by the time that's ready for you to go ahead and get through the application process. So what do you need to do to qualify? So the first thing you want to do is make sure that your loan servicer, whoever your loan servicer is, they know how to get in contact with you. If you've moved recently or you've changed phone numbers, make sure they have that information

Starting point is 00:10:08 so that they can get in contact with you when it's time for you to apply for this. And if you don't know who your loan servicer is, because over time you just set it up automatically and you've been paying it, you can call or consult with the Department of Education. And there's actually a page that says, who is my loan servicer? So we'll link it up down below so that you can check that out for those instructions because you want to make sure that you take advantage of this opportunity. Because how you handle these opportunities is going to be something where it tells you how much wealth you're going to be building over time. Now, another question that we're getting a lot is will my payments be recalculated. And yes, they will be recalculated in some way. So when it comes to your payments on a loan, for example,

Starting point is 00:10:46 let's say you have a $20,000 loan, and just for easy math, you're paying $800 a month. That's what you're required to pay. That's way too high for a $20,000 loan. But let's just say, for example's sake, you're paying $800 a month on a $20,000 loan. Well, if it gets cut in half, it's going to be recalculated. The recalculation could be cut in half,

Starting point is 00:11:03 but sometimes it's not. It just depends on how they do it. So the math behind this is something where your loan payment should and most likely will go lower. Now, if you have $200,000 in student loans and you're getting $10,000 for giving, given, your payment structure may not change much, if at all. But if it's something where it's getting cut 25, 50, 75%, then you're going to see a massive difference with your payment. The reason why we're bringing this up is because when your payment has that massive difference, there's some things I'm going to show you what to do with those extra dollars as they come in,

Starting point is 00:11:33 and I'm going to show you in order step by step how you should utilize those extra Here's the quick way to think about this. If you have a massive loan, you're most likely not going to have a huge impact on your repayment. There may be some where your payments get lower. But in addition, if you have a loan where this is a significant impact, it's cutting it in half or it's cutting it by 25, 50, 75%, then you're going to see a difference in how much you're going to be paying every single month.

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Starting point is 00:15:10 All right, so let's get into the meat and potatoes of this episode because what I want to do, and nobody's talking about this, is I want to show you, hey, I've got some extra dollars here. Some of my student loans have been forgiven. What should I do with this money instead? Should I just go blow it all on something I like? What should I do with this money? So I'm going to give you step by step in order if you want to grow your wealth,

Starting point is 00:15:30 if you want to build wealth over time, and if you want to get ahead financially, this is what we talk about here and what you should do with this money. So once your loans get recalculated, you're going to get a new number. And when you get that new number, let's say, for example, that you were paying $800 a month and now you're going to be paying $400 a month. Well, if that's the example, and you have an extra $400 a month, here's what to do so that you can use that money to grow your wealth, instead of it just getting lost within your finances,

Starting point is 00:15:56 and then your cost of living goes up over time because you have this extra $400. If you do that, you're never going to see it again. you're never going to see it going towards building wealth. So you have an opportunity here. You have an opportunity that it's facing right in front of you. And what you do with this money could mean that you're building wealth over an extra million dollars by the time you retire. So making this decision is a multi-million dollar decision if you make it right.

Starting point is 00:16:19 Depending on how much this money is, this could be a multi-million dollar decision. So here's what we're going to do is we're going to go through this order and see what you should do. The first one is if you have this extra cash and your student loan is a high interest debt, you should continue to put that cash towards your student loan because you need to pay down high interest debt as fast as you possibly can. Now, when you look at high interest debt, it could be anything outside of your student loan, but first of all, if it's at your student loan, you just need to keep it there.

Starting point is 00:16:45 Secondly, looking at your credit cards. Credit cards usually have the highest interest rate of anything else. They usually are the debt with the highest interest rate. So if you are paying down credit card debt, this money should be going towards your credit card debt because anything above a 6% interest rate is what we classify as high. interest debt because if it's below a 6% interest rate, mathematically you come out on top by investing those dollars instead of paying down that high interest debt. Anything else? A personal loan. If you have a personal loan that has high interest, you need to be paying that down.

Starting point is 00:17:18 Any high interest debt, the first thing you need to be doing with this money is putting it towards that high interest debt, getting it paid down because that's a pants on fire emergency. Debt will absolutely destroy your ability to build wealth over time. You need to take this money and get rid of that debt if it's high interest. Number two, the second thing you need to be doing, and this is a big one, is if your company offers a 401k match, or they offer a match on your Roth 401k, or they offer a match on your HSA, and you have not been contributing because you've been stretched really thin, this is the second thing you need to be doing. And the reason why is this is a 100% return on your money. Now, if you don't know what a 401k match is, if you work at a company and your company offers a 401k, most likely they have something along the lines of a $401. 401k match. And what that means is that, say, for example, your 401k match is 3%. Well, if you put 3%

Starting point is 00:18:08 down, then your company will put 3% down. Sometimes it's half of what you put down. So if you put 6% down, they'll put 3% down for you. But think about it this way. You putting that 3% down and getting an additional 3% back is a 100% return immediately. So not taking advantage of this is one of the worst things that you can do financially because you're just missing out on free money. It's completely free money that they are willing to give you. And over time, it makes a massive difference. We've done studies to show if you miss out on the match and you're maxing out something like a 401k, you could be losing out on half a million to a million dollars just by missing out on that.

Starting point is 00:18:43 So making sure you do this and making sure you get your dollars into that match is incredibly important. When we talk about it on the stairway to wealth, this actually comes before even doing the high interest debt. The reason why is because it's 100% return and your high interest debt you're losing 20%. So this is so incredibly important to make sure that you get that match because that match is something that's going to really benefit you over time. Number three, if you don't have an emergency fund at all, the next thing to do is get those dollars into an emergency fund. Now, what does an emergency fund do? Your emergency fund protects you from life. And you've heard me say this before if you've listened to this podcast for any amount of time.

Starting point is 00:19:20 It's not if something is going to happen to you. It's when something is going to happen to you. So when something is going to happen to you is what you have to prepare for. because something will always happen to you. For example, out of the blue, my wife's car just had an air conditioner issue. So we're paying $2,500. That's coming right out of the emergency fund to be able to pay that. If we did not have that, there would be a very stressful event.

Starting point is 00:19:42 But since we have the money just there, is completely stress-free when it comes to your finances. Now, here's the key to your emergency fund. How much should you build up? Because really, the true form of emergency fund should be protecting you if you lose your job. So if you lose your job, an emergency fund is there to funnel cash to allow you to still live your life without having stress, going into debt, all these different things. It allows you to continue to live your life while you find another job. So how much you should have in your emergency fund depends on what type of job that you have.

Starting point is 00:20:13 Number one, if you're fearful of losing your job, then you should beef up that emergency fund right away, as much as you possibly can. Because if you think you could lose a job in a recession, you're in a job that really does not do well throughout recessions, then you definitely should have that emergency fund beefed up more. Secondly, if you're in a job that you're not worried about getting fired, but it's very hard to find another job if you did get fired, then that's another place where you need to beef up that emergency fund. And then thirdly, if you're in a job that is fairly simple to get another job, maybe you're

Starting point is 00:20:43 in programming or something along those lines, where it's very easy to find another job. You can find one probably in another couple of weeks to a month. Then that would be something where you don't need as much of emergency fund if you don't want to. I still like to have an extra emergency fund, but you don't need it if you don't want to. So here's what I recommend. If you think you're going to get fired or your job is very hard to find another job, then six months emergency fund is what I would target. But if you can find a job really quickly, then two, three months in your emergency fund is completely fine. Now, what I like to do with the emergency fund, and one key here is a lot of people think they

Starting point is 00:21:14 just do six months and stop. And you can absolutely do that. You don't have to add any more. I like to slowly add more over time. Why? Because A, if you use it, then you don't have to build it back up and you can get kind of past the point where you are. But B, as you approach retirement age, this is my favorite thing to do, is have a couple years of cash on hand. Why? Because the market takes a dip. You can live on that cash, especially if there's a recession. You can live on that cash on hand. So you don't have to draw from your portfolio when the market is down. How many years do you need? Anywhere past one to two years is completely fine. Now, two years is kind of the target where I like to stay at. And then if you approach retirement, you can even do more if you're worried about it.

Starting point is 00:21:52 But there's a lot of things to think through and a lot of things to consider when it comes to your emergency fund, but that's the third thing that you should be doing with those dollars if you don't have them. Now, if you have zero cash saved at all, the first thing you need to do

Starting point is 00:22:02 is at least get one month's cash saved up so that you can protect yourself before any of these other things. Because that's going to allow you to actually get to the next level so that you can protect yourself while you're doing these other things. So utilizing that cash

Starting point is 00:22:14 to just get one month's saved up. If you spend $5,000 a month, just getting that $5,000 built up over the course of maybe a year or so, then you'll be able to be able to get to the point where you can actually start making some of these moves as well. Now, if you've got all those things in place and if you've got all those things secured, the next thing you want to do is bump up your investments.

Starting point is 00:22:34 Now, if you've been investing a little bit over time, hats off to you, that's absolutely amazing. If you're new to investing, we can talk about where you should be investing your dollars, the order to be investing your dollars as well. But this is something that you need to invest your money over time if you want to be able to retire. If you don't invest your dollars, you will never retire. Even if you have $3 million, drawing down on $3 million every single year when it's not invested,

Starting point is 00:22:55 is very difficult to retire over time. So you want to make sure that you have your money invested so that you can build wealth over your time because it's a lot harder to get to a point where you can actually retire. It's a lot harder to get to that $3 million when you're just saving it in cash. So making sure you invest your dollars will be the next step. Now, here is the order that we like to invest in here. Number one, like we just talked about, is the 401K match. then my favorite of the next set of accounts is actually the Roth 401k because you can get more

Starting point is 00:23:22 dollars into that Roth 401k. So if your company offers a Roth 401k, get as much cash as you possibly can into that thing because it's amazing. The tax money goes in and the money grows tax free and you can pull the money out tax free. If your company doesn't offer that, then look at the Roth IRA and the HSA. The Roth IRA is the same as the Roth 401K. Tax money goes in, money grows tax free, you pull the money out tax free. The HSA, the HSA. The H. HSA has triple tax benefits. Now, this is actually a health savings account. So you put the money in and it's tax-free.

Starting point is 00:23:53 The money grows tax-free and you can pull the money out tax-free as long as you have a standard deduction. But as you age and as you hit retirement age, then the HSA just turns into the same thing as a traditional IRA. So thinking through it this way, the HSA is a great tool to be able to use over time. Then after that, then you go back to maxing out that 401K after or your traditional IRA, 457, 403B, all of those things, they all act the same. So money, tax is deferred going in. The money grows, and then you can pull the money out and you get taxed when you pull the money out. And then after that, we talk about things like wealth accelerators. Now, one thing I want to know, because we have a lot of real estate investors who listen to this podcast. If you want to invest in real estate, you want

Starting point is 00:24:34 that to be one of your primary diversified ways that you invest, you can do it in between the Roth stage and the 401k stage, absolutely. You can even do it at the Roth stage if that's the only way you want to invest, that's the only way you're comfortable and you know that you'll be motivated to do it then. And you can absolutely do it at that point in time. But the thing to think about here is I like to have that extra Roth, even if it's just the Roth IRA maxed out, because it's like your safety net. If anything happens and you're maxing out that Roth every single year, you'll still have a couple of million dollars over the course of 40 years inside of that Roth IRA if you're maxing it out every single year. So it's your backup

Starting point is 00:25:06 safety net if real estate has an issue or you need that money and maybe the market goes down right when you retire. Well, at least you can utilize some of that Roth IRA to live on, until real estate recovers as well. So I just like to have that diversification, is having both is really incredibly powerful. So my favorite spot to start is, if you're really, really interested in real estate and want to invest in real estate more,

Starting point is 00:25:26 is making sure you have that cash on hand in the emergency fund, hitting that Roth IRA, then going into real estate right after that. Now, you can also do it right after the 401KMAX. So if you're starting to make a lot more money and you don't know what to do with your money, you need tax shelters, then real estate is a fantastic place to put that money

Starting point is 00:25:42 to have those tax shelters as, Well, and then the wealth accelerators are right after the 401K step. So wealth accelerators are things like real estate. But in addition, there are also things like if you want to buy businesses, if you've heard our episode with Cody Sanchez, she talks about how you can buy boring businesses, car washes, laundromats, those type of things. In addition to wealth accelerators, you can look at other various things as well,

Starting point is 00:26:03 like buying farmland. There's so many different things that you can do at this level. And if you're at this level, then this is the place where you really want to get your dollars working towards. Now, if you aren't maxing out all these other things and you still have student loans, you must have a low interest rate student loan and you're looking to max out the other things first which makes a lot of sense.

Starting point is 00:26:19 And at the wealth accelerator level, it's hard to get past. But once you get past that point, you can also go taxable brokerage. And a lot of people will argue not to have too much in retirement accounts and have it earlier in taxable brokerage accounts, but there's a lot of ways to get your dollars

Starting point is 00:26:31 out of those retirement accounts where you're saving so much money in taxes and there's just so many different things that you can do to get your money out of those retirement accounts that you don't have to worry about not being able to tap in and access it when it's time to retire. So one, for example, if you're in a Roth,

Starting point is 00:26:47 is the Roth conversion ladder. We have an entire episode on that, so we'll link it up down to the below in the show notes so that you could check that out as well. And then after those wealth accelerators, we have things like the 529 account maxing out for your kids and long-term future goals saving up for other things as well.

Starting point is 00:27:00 So these are some of the steps that I would take in the investment realm if you're looking to invest those dollars instead or you haven't started investing yet. So this is another level that you can get to with your dollars. And then lastly, obviously, if you've done all of those things, then you can go into low interest debt,

Starting point is 00:27:18 paying that down, getting rid of some of that low interest debt, so that you can build wealth over time, like your mortgage, if it's a low interest debt, or medical bills or anything else that you have, or if your student loan is low interest, then you can go about paying the rest of that off as well. Now, before we jump out of this episode,

Starting point is 00:27:31 I just want to answer a few frequently asked questions that I'm getting rapid fire, and then we'll wrap this episode up. All right, so here are some really quick, frequently asked questions and if you guys have any other questions, make sure you reach out to me on TikTok or Instagram

Starting point is 00:27:48 and we can work through answering some of those as well. So will I have to pay federal taxes on the canceled debt? Quick answer. No, you will not. Now, will it impact your taxes in the future? We have no idea.

Starting point is 00:28:01 But will you have to pay federal taxes on the canceled debt? No. Do I qualify for forgiveness if my loans were in default? Yes. So if you have defaulted loans that you were not paying,

Starting point is 00:28:12 on time, you still will qualify for forgiveness if they're in default and you meet the other qualifications. Which types of debt qualify? So only federal student loan debt qualifies. If you have a private loan, it will not qualify for this forgiveness. Only federal loans will qualify for this. So making sure you take note of that is incredibly important. And should I wait to see if more relief happens? So the likelihood on that, and I didn't even think it was going to happen this time around, but the likelihood on more federal relief coming is very low. So I would not wait for more relief. They even stated that even on the student loan repayment pause, that that is going to be the last time that they push it back is December 31st of 2022. So there's not going to be much more

Starting point is 00:28:56 relief coming, at least in the short term. So now is the time to start to work towards getting rid of these loans so that you don't have them anymore, especially if they're high interest. So that's just a quick rapid fire of some of the questions that we are getting. If you guys, have any other questions, reach out to us on social, make sure you are subscribed to the master money newsletter. We are so excited for that. There's so many cool ideas that we have for the master money newsletter. But in addition, people are going to get access to index fund pro first, which is our investing 101 course. They're going to get access to the free debt course first on the master money newsletter and a bunch of other things as well. I'm going to give away a lot of

Starting point is 00:29:32 freebies there. So making sure that you're subscribed to that is going to be something that you definitely want to be doing. Now, if you guys have any questions, like we said, reach out. Thank you guys so much for listening to this episode. If you enjoyed this episode, share it with a friend, share it with a family member, and thank you again. And like I said, if you are getting value, leave a five-star rating and review on Apple Podcast or Spotify. That truly helps us teach more people how to build wealth. I can't thank all of you for leaving those reviews.

Starting point is 00:29:59 Thank you for sharing with your friends and family. I truly appreciate each and every single one of you, and we will see you on the next episode. Rosen lasagna, medium power, 15 minutes. Sounds like Ojo time. Let's play. Feel the fun with Play Ojo. The online casino with all the latest slot and live casino games. What you win is yours to keep with no wagering requirements, instant payouts, and no minimum withdraws.

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The Personal Finance Podcast - Here's What to Do if Your Student Loans Have been Forgiven

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