‘I don’t have any other debt’: I have $40,000 in student loans, but saved $70,000 due to deferred payments. I live in the Bay Area. What should I do with this money?

I am a single 35 year-old with $40,000 remaining in federal student loans. In early 2020, I was super lucky to land a great new job that significantly increased my income. This was the middle of the pandemic so my loans were, and still are, deferred. During this time, I decided not to make payments and worked really hard on saving money. 

I was able to sock away $70,000 into my personal savings account. Now that the interest-free payment pause is ending I am hoping to get your input about the best path forward. I don’t have any other debt and I am contributing 15% to my 401(k) between my input and the company match. I don’t have a large balance (around $80,000) compared to my current salary.

‘In early 2020, I was super lucky to land a great new job that significantly increased my income.’

I live in the Bay Area so the idea of buying a home is not on the table right now. Is there anything else I should be doing with this money? Should I be investing and trying to beat the interest rates on the loans? More retirement savings? Should I be considering the current economic situation and inflation? If so, what’s the impact of that?

The plan has always been to pay the student loans off and keep the rest as the emergency fund, but I guess I’m just looking for confirmation that this is the most sound plan and that I’m not missing something. I haven’t had the opportunity to save money like this in the past so now I need to figure out the next steps, both with this question and what to do after the loans are paid. 

I don’t come from a financially savvy family so I am trying to figure things out as I go, mostly via good-ol’ internet searches.

Student-Loan Shy

Dear Shy,

Congratulations on saving $70,000. That’s not easy.

Sometimes, no action is an action. That could be wise, especially in the months ahead. We are still months away from finding out how the Supreme Court will rule in the Biden administration’s plan to cancel student debt. President Biden’s executive order proposes wiping away federal student-loan debts up to $10,000 and, in some cases, $20,000.

President Biden maintains that the HEROES Act, the statute passed by Congress in 2003, gives the executive branch the power to enact the plan. But Republican opponents disagree. The Supreme Court is now mulling these questions. There are signs that a majority of justices are questioning the plan’s fairness and could strike it down, other experts see alternative outcomes.

In the meantime, consider your interest rate on your federal student loan. With the annual rate of inflation running at 6.4% in January, how does your interest rate compare? Are you paying 3.73%, the rate on federal student loans for undergraduates dispersed between July 2021 and the end of June 2022, or 4.99%, or more? Graduate students and parents who took out loans between July 2022 and the end of June 2023 could have loans with interest rates as high as 7.54%. 

Annette Nellen, professor and director of the Master’s of Science and Taxation Program at San José State University, notes you may want to consider paying off your loan every month. Given that interest rates on federal student loans are currently at 0% due to the pandemic payment pause, you could get more bang for your buck. But you don’t want to pay off the entire loan — only to find that the Supreme Court has not blocked Biden’s student-loan forgiveness plan, assuming you qualify.

‘Sometimes, no action is an action. That could be wise, especially in the months ahead.’

“Check if your employer has an educational assistance program,” Nellen adds. “If so, your employer can reimburse you for tuition and fees, up to $5,250 tax free for the employee. What’s more, the expanded definition includes not just tuition and fees, but payments made to any qualified education loan.” You can read more about that here.

There are some suggestions — not to be taken too literally — as to how much you should have saved in your 30s. In an ideal world, a 30-year-old should have twice their salary saved, according to one guideline from Fidelity Investments. Many millennials say that’s just not possible, given how much people spend on rent and mortgages, student loans and other bills.

When you enter your 40s, most financial institutions recommend you start investing outside of a 401(k) or IRA, try to keep a lid on your expenses as your salary rises, and save 2-3 times your income. Again, that may be a high bar given that we are coming off a period of four-decade-high inflation, and the rise in house prices over the last three years. 

Keep a watchful eye on the housing market in your area. The housing market is in a bit of a holding pattern at the moment, as the 30-year fixed interest rate once again flirts with the 7% mark. People without the cash to buy a home outright are obviously reluctant to buy, and those who wish to upgrade or downgrade their existing home may not want to lose their low rate.

As Matthew Walsh, Moody’s Analytics housing economist, recently said: “The U.S. housing market is crumbling under the weight of higher mortgage rates and rock-bottom affordability.” Single-family home prices slid 1% in January, as compared to December 2022, according to data from Moody’s Analytics. But each housing market has its own set of variables.

Owning your own home may indeed remain out of reach for you at this moment, but I believe it can be on your journey if you keep doing what you’re doing: thinking ahead, saving and planning to continue to work hard and improve your salary as you get older, continue with your 401(k) with an employer match. A mutual fund provides access to a broad range of equities.

Keep 6-12 months of savings for an emergency fund, and avoid the kind of risky behavior that is sometimes advocated on social-media sites like YouTube, TikTok and Reddit. This recent report from the Finra foundation, an organization that is associated with the financial-regulatory agency, found an increase in risky investing behavior.

The conclusion: “Younger investors are more likely to engage in riskier investment behaviors.” Some 36% of investors under 35 trade options — betting on whether a stock rises or falls — versus 8% of those 55 and older, and 23% under 35 reported making purchases on margin — using a loan from your brokerage house — compared to 3% of those 55 and older.

Rather than investing in an effort to beat the rate on your student loans, invest with a long-term view. This money and the money you earn on that initial investment will continue to work for you over the next three decades. The average federal student loan in the U.S. hovers at around $37,574, so you’re not alone, and you’re broadly in line with the average. 

Caution is a virtue. As is curiosity to learn more about investing. And you appear to have both.

Yocan email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com, and follow Quentin Fottrell on Twitter.

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