When the pause on federal student loan repayments ends on August 31, 2022, millions of Americans will have to choose what to give up financially to meet the payments. Most will have to reduce their budget for living expenses, although just over one in 10 will have to give up investments that could bring them long-term returns of nearly $2 million.
See: Without student loan forgiveness, the average American will have a $393 reduction in their monthly budget
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Since the payment pause took effect two years ago, 61% of student borrowers have used the money they would have invested in student debt to pay for necessities like groceries, gas and bills. utilities, according to an April survey of 1,000 student borrowers. by Payitoff, a fintech company.
A third of respondents said they used the money to pay off other debts such as credit cards and mortgages. A slightly lower percentage invested the money in savings or used it to pay for family needs like childcare and caregiving. Just under a quarter used the money for lifestyle purchases such as travel, clothing and fitness. Another 12% said they had invested it.
If the Biden administration ever decides to cancel college loans — a long shot, some experts say — it would obviously give borrowers a huge financial boost. The average student loan payment in the United States is $393 per month, according to the College Investor website, which cites research from the Federal Reserve Bank of New York.
Suppose a borrower is financially stable in all other areas and decides to continue investing that money in the stock market every month for 30 years. Payitoff estimates that their wealth would increase by $1.87 million if the stock market continued to behave as it has for the past three decades. Over the 30-year period from 1991 to 2020, the average annual return of the US stock market was 10.72%, according to Sofi.
“There has been a lot of talk about how forgiveness will change people’s lives – unlocking new financial opportunities and making upward mobility possible for tens of millions of people who have been shackled by their student loans,” said Payitoff CEO Bobby Matson to GOBankingRates in an email.
But borrowers should not hope their loans will be forgiven, he added. Instead, they should take advantage of zero-rate loan repayments while the pause is still in effect.
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“Full and complete student loan forgiveness is very unlikely to occur, which means your debt may be reduced, but it probably won’t go away,” Matson said. “So if your annual income is far greater than your remaining student loan balance, you should absolutely make payments now while no interest accrues on federal student loans. Any payment you make is returned 100% to the principal. You will never have this opportunity again.
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