I’ve Paid Off My Student Loan Debt, Now What?
by Catherine Tansey
You’ve been strategic, organized, and dedicated, and you’ve finally paid off your student loan debt — congratulations! Capitalize on your success and momentum by identifying the financial goals you’d like to achieve next.
But first things first, a celebration is in order. While having paid off your student loans is a major accomplishment, you’ll get little more than a routine notice from your student loan servicer noting the balance on the account is zero. Take it into your own hands to celebrate.
“Pre-COVID, I would have said go out for an expensive meal that you normally couldn’t afford! It’s not often you hear a financial planner say something like that, but you deserve it,” said Simon Brady, CFP®, CDFA®.
Brady says it’s important to take time to recognize your accomplishment because the following day, it’s time to get to work. Assuming you already have six months of living expenses saved, here’s how to prioritize your finances after you’ve paid off your student loans.
Attack other debts with vigor. Ride the momentum of your recently paid off student loans and continue to diligently shovel money at other debt.
If you have credit card debt, tackle that next. It’s a good idea to pay off credit card debt before student loan debt due to the higher interest rates, but we’re not always perfect when it comes to our finances, and sometimes those balances creep up.
You may decide you’d like to work toward paying off your car loan next, or put extra funds toward an existing mortgage. Talk to a fee-only certified financial advisor if you’re unsure where your money is best spent, saved, or invested.
If you’re fortunate enough to have access to an employer 401(k) match program, you should be pouring money into it — especially after you’ve paid off your student loans. “The company match in a 401(k) has has a rate of return of 100%. It is quite literally free money,” said Brady.
Employers typically offer a match for 3% of your contributions, but some companies offer more. If you make $80,000 and contribute 6% of your salary, that’s $4,800. At a 3% match, your employer is contributing $2,400 on your behalf — for free. Keep in mind that some companies require you to work at a company for a period of time before contributing the full amount.
Traditional IRAs, Roth IRAs, and if you’re eligible, SEP IRAs, are advantageous places to invest your money for retirement. The tax-free — both on withdrawals and contributions — nature of these accounts while in retirement make it a highly attractive option.
It can be hard to prioritize saving for retirement when you have significant student debt, but the sooner you start, the better. Compound interest is a nasty enemy when it’s working against you (like with debt), but a powerful ally when it’s on your side like with retirement savings). After you’ve paid off your student loans, re-energize your approach to retirement savings.
Brady recommends seeking out professional advice when you’re considering the options. “It’s at this point that you may want to bring in a qualified, fiduciary fee-only financial planner to advise you because the eligibility profiles and the decisions as to which ‘buckets to fill first’ can be complex,” he said.
Many young people don’t feel comfortable starting a family or buying a home while they have student debt. But once you’ve paid off your student loans, you’ve also freed up a chunk of cash you can put directly toward preparing for these goals.
If home ownership is next on your list of must-haves, consider banking the same amount you were putting toward your student loans toward saving for your first mortgage. Remember that if you can put down at least 20%, you’ll save yourself the cost of private mortgage insurance — which can really add up.
If you’re ready to start a family, you may consider opening a college savings account for your child, like a 529 college savings plan.
At a minimum, you should have six months of living expenses saved. But for some people who faced greater responsibility or uncertainty, like the main earner of a family or a self-employed individual, saving 12 months worth of expenses is a smarter option.
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