Given that it is the hot topic of the moment, let’s look at the potential effects of canceling student loan debt. We will intentionally set aside the debate over whether it should or should not have been done. That argument in itself is an entire debate but one that is not the focus of this blog. This blog focuses on the personal finance side. Let’s jump in and take a look at how this windfall can boost the personal balance sheet.
Basically, any forgiven debt is a windfall. Usually, when a debt is cancelled or forgiven, the amount relieved is taxable to the recipient. That is not the case with this round of student loan debt cancellation at the federal level. However, at the state level, thirteen states are considering making the forgiven loan amount taxable. Thankfully, California is not one of those states at this time most likely due to our historic $97 billion budget surplus. So, not being taxable is the first benefit of student loan debt cancellation.
A huge non-monetary benefit that cannot be overlooked is the reduced stress with no longer owing this debt, or at least having your debt reduced. The psychological benefit of seeing light at the end of the debt tunnel cannot be overstated!
The current provisions call for those who do have a remaining balance to pay no more than 5% of monthly income in payment. This is unusual as payments are generally structured based on annual income. This is very beneficial for those with remaining balances who may have fluctuations in annual total income. Capping the payment at 5% provides certainty for budgeting.
Freedom, anyone? Those without this crushing debt can now enjoy a sense of freedom to move, switch jobs, or change what they need to change to earn more money or opt to even take a lower-paying job if needed. Not being tied to this debt is liberating and has substantial benefits.
The biggest benefit is most likely the benefit that is positive for all of us. Instead of being sucked up by lenders (or the government), this money is now back in circulation! That’s right, the folks who now have free cash flow are free to use that money toward discretionary purchases. Think cars, homes, business loans, etc. This money being back in circulation helps the economy at large. For some, this is an opportunity to put this windfall money toward paying down other debt, or even saving and investing more for retirement. Either of these options still benefit society at large.
As an independent CERTIFIED FINANCIAL PLANNER™, I can help you with your new windfall to reach your financial goals. Contact me and let’s get started on a budget, savings, investing, or retirement plan. #talktometuesday #education #Hireaplanner #stressfree #savings #retirement #studentloan #forgiveness #CFPPro #whatsMYnumber #budget #spendingmap