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Here’s Why You Should Invest In Both A Roth IRA And 401(K) At The Same Time

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Here’s Why You Should Invest In Both A Roth IRA And 401(K) At The Same Time

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When it comes to choosing between a 401(k) and a Roth IRA, it doesn’t have to be one or the other. In fact, many experts recommend using both retirement accounts to diversify your tax benefits and take advantage of the perks that each account offers.

Both Roth IRAs and 401(k)s have become two of the most popular retirement savings vehicles. Both allow workers to save for retirement in a tax-advantaged way, but they differ in terms of how you can set up an account, their contribution limits, their investment options, and more.

Are you wondering which retirement account is best for you? Wonder no more because you should be using both, and here’s why. We’re exploring the differences between a Roth IRA and a 401(k), and we’ll show you how to take advantage of both accounts.

401(k) vs. Roth IRA: What Are The Differences?

401(k)

A 401(k) is an employer-sponsored retirement plan that’s offered by many private-sector employers in the U.S. In most cases, your 401(k) contributions are withheld from your paycheck pre-tax, meaning they reduce your taxable income. Then, the money gets deposited and your investments grow tax-deferred in the account. Your withdrawals are subject to income taxes during retirement depending on your tax rate at the time.

“What’s neat about how these work is your contributions are directly pulled from your paycheck, so it’s a seamless way for someone to save for retirement and allows workers to have access to traditional and Roth vehicles, if the employer allows it,” said Mindy Yu, Director of Investing at Betterment.

In 2022 the IRS allows workers to contribute up to $20,500 to a 401(k) plan. For workers 50 and older, there’s an additional catch-up contribution of $6,500. 

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“The other benefit is that some employers do match your contributions, which is a large benefit,” Yu said. “Employer matches are a way for your earnings to grow because it’s essentially free money or a 100% return on your contributions up to that match.” If you are eligible for an employer match, make sure that you are putting enough money into your 401(k) to be eligible for the match.

Roth IRA

A Roth IRA is a type of individual retirement account that allows workers to save for retirement outside of an employer-sponsored plan. Someone with earned income can open a Roth IRA with nearly any popular brokerage firm.

Roth IRA contributions are made after-tax, meaning they don’t reduce your taxable income in the current year. However, once the money goes into the account, you’ll never pay taxes on it again. Your investments grow tax-free during your working years, and you can take tax-free withdrawals at 59 1/2.

“Contribution limits are definitely lower compared to a 401(k),” Yu says. “For 2022, it’s $6,000 compared to the limit of $20,500 for a 401(k).”

Just like a 401(k), a Roth IRA allows for a catch-up contribution for workers 50 and older, but in this case, it’s only an additional $1,000.

One important provision of a Roth IRA is that not everyone can contribute. First, you must have earned income to contribute to an IRA. And while the maximum contribution is $6,000, you can only contribute up to 100% of your earned income. So if you earn less than $6,000 in a given year, you can only contribute what you made. 

Another important restriction on Roth IRAs is that you can only contribute if you’re under a certain income limit. In 2022, once your income surpasses $144,000 for single filers, or $214,000 for joint filters, you won’t be able to contribute without doing a backdoor Roth IRA, which is where you contribute $6,000 to a traditional IRA, invest it and convert it to a Roth IRA.

This chart shows the differences between a Roth IRA and a 401(k):

401(k) Roth IRA
Plan Sponsorship Employer-sponsored Individual
Tax Advantage Pre-tax After-tax
Contribution Limit $20,500 per year

$6,500 catch-up contribution
$6,000 per year

$1,000 catch-up contribution
Income Limit None $144,000 for single filers (MAGI)

$214,000 for joint filers (MAGI)
Employer Match Yes No
Required Minimum Distributions Yes No

Pros and Cons of 401(k)s

There are many pros and cons to a 401(k). Take a look at the chart below to see what they are:

Pros

  • High contribution limit

  • Potential for employer match

  • May allow for both pre-tax and Roth contributions when you use a Roth 401(k)

Cons

  • Limited investment options

  • Required minimum distributions at 72

  • May be subject to a vesting period for employer contributions

Pros and Cons of Roth IRAs

There are many pros and cons to a Roth IRA. Take a look at the chart below to see what they are:

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Pros

  • Tax-free investment growth and withdrawals

  • Wider variety of investment options

  • No required minimum distributions

Cons

  • Low contribution limit

  • No potential for employer match

  • Subject to income limitations

Is it Better to Invest in a 401(k) or Roth IRA?

If you’re wondering whether it’s better to contribute to a 401(k) or a Roth IRA, don’t because you should be investing in both. Experts agree that the first account you should take advantage of should be a 401(k), if you’re eligible through one at your job. Make sure you are putting enough to get the employer match first.

“As I mentioned earlier, an employer match is free money that you don’t want to miss,” Yu said.

Then move onto your Roth IRA. Try to max out the $6,000 a year, if you are eligible, and if you have enough money after that, go back to your 401(k) and max it out to the entire $20,500 annual limit.

Pro Tip

Don’t feel the need to pick between just a 401(k) or a Roth IRA. If you can, invest in both and take advantage of time and compound interest.

“I think if you have the ability to contribute to both, you should,” says Chloe Elise, certified financial coach and founder of Deeper Than Money. “I recommend you first take advantage of contributing enough to your 401(k) to get any kind of employer match. Then, I would focus on maxing out your Roth IRA while you are within the income limits.”

Elise also points out that if you want to take advantage of Roth IRA contributions but aren’t eligible for a Roth IRA, you can ask your employer if there’s a Roth contribution option within the company 401(k). You’ll get the same tax advantage without being limited by your income.

Which is Better for Taxes? A Roth IRA or 401(k)?

We’ve talked briefly about the different tax implications of a 401(k) and Roth IRA, but let’s dive a bit further into them here. As we mentioned, a 401(k) and a Roth IRA have different tax advantages.

In most cases, 401(k) contributions are made pre-tax, meaning they reduce your taxable income — and, therefore, your tax burden — in the current year. The money grows tax-deferred while it’s in your account, and you’ll pay taxes on your 401(k) withdrawals at your ordinary income tax rate at retirement.

A Roth IRA, on the other hand, allows you to make your contributions after taxes. While there’s no tax advantage in the current year, your money grows tax-free in the account and you can withdraw both your contributions and earnings tax-free during retirement.

So which tax advantage is better? Traditional 401(k) contributions are generally more beneficial for taxpayers with a high income today who expect to have a lower income during retirement. In other words, you can get a tax break today if your tax rate is high, and then defer those taxes until you’re in a lower tax rate. And vice versa.

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A Roth IRA is better for taxpayers who expect to be in a higher tax bracket during retirement. You can pay the taxes today while your tax rate is lower, and then enjoy tax-free withdrawals while your tax rate is higher during retirement.

“For many young people, the beauty of a Roth IRA is that they are paying tax on the money today while they are potentially at the lowest tax brackets of their life,” Elise says.

Unfortunately, it’s impossible to know for sure whether your income tax rate will be higher or lower during retirement. Elise notes that many experts believe tax rates, in general, will be higher decades from now. As a result, paying the lower tax rate today is beneficial.

What about a Traditional IRA?

The 401(k) and Roth IRA are two of the most popular choices available for retirement savings, but we’d be remiss if we didn’t also mention the traditional IRA. 

This account combines some benefits of a 401(k) with a Roth IRA. Traditional IRA contributions are pre-tax, meaning they allow you to reduce your tax burden in the current year and defer the taxes until retirement. And like a Roth IRA, a traditional IRA offers a wider selection of investments than a 401(k).

Of course, a traditional IRA also has the downsides of a Roth IRA. There’s a low contribution limit of $6,000. Additionally, while anyone can contribute to a traditional IRA, not everyone can deduct their contributions. If you are eligible for an employer-sponsored retirement plan — or your spouse is — then you’re subject to income limitations on your traditional IRA deduction.

“Traditional IRAs can be deductible or non-deductible, so I would also caution you to check to see if you are even eligible to deduct your IRA contribution,” Elise said.

So who is a traditional IRA right for? First, a traditional IRA is a great option for anyone who doesn’t have access to a retirement plan through work, since you won’t be subject to the income limits on your contribution deductions. 

It also may be a necessary tool for someone doing a backdoor Roth IRA. With this type of transaction, you contribute money to a traditional IRA and then convert those funds to your Roth IRA. It’s a way around the income limits on a Roth IRA, especially for those who can’t deduct their traditional IRA contributions anyway.

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XRP Is Hard To Buy In The U.S. Here’s What Investors Should Know About Ripple And Its Related Crypto

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XRP Is Hard To Buy In The U.S. Here’s What Investors Should Know About Ripple And Its Related Crypto

Illustration by Next Advisor

We want to help you make more informed decisions. Some links on this page — clearly marked — may take you to a partner website and may result in us earning a referral commission. For more information, see How We Make Money.

XRP is currently the sixth-largest cryptocurrency by market cap, but you may have trouble buying this native token of the Ripple blockchain network.

As of early 2021, XRP is unavailable to buy on most centralized U.S. exchanges. Ripple Labs, a company whose history is intertwined with XRP, has been engaged in a lengthy lawsuit with the Securities and Exchange Commission (SEC) since December 2020, and until there is a legal verdict, XRP holders and anyone who wants to trade XRP must be patient. The lawsuit revolves around the SEC’s view of XRP as a security, a view that’s at odds with Ripple’s claims that XRP is a currency, rather than a security. 

In response to a request for a statement, the SEC said it “does not comment beyond public filings.” Ripple acknowledged in an emailed statement that the lawsuit has “made it substantially more difficult for U.S. persons to access or use XRP.”

Raj Varghese, a 29-year-old risk management consultant who bought XRP in 2017, has firsthand experience with the situation after buying the cryptocurrency. “I thought it had more sticking power than Bitcoin,” he says. Varghese purchased roughly 5,000 XRP tokens, which at the time were valued at less than $1. His plan was to buy and hold his crypto long term.

But Varghese started receiving notices from the exchange on which he purchased and stored his XRP that it would be blocking U.S.-based investors from accessing their XRP while the company underwent the SEC trial. “They kept giving me this warning saying, ‘At this date, you won’t have access to this account anymore,’” says Varghese. “Eventually, one time I tried to log in and it was like, ‘Yeah we can’t, we can’t service this account.’”

Varghese eventually moved his XRP to another exchange. While he still can’t buy more XRP, his account isn’t blocked like it was on the previous exchange.

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With limitations on buying XRP at centralized exchanges, you may have to get creative. Experts recommend new investors be extra careful when buying altcoins like XRP as they are even more volatile than more established cryptos such as bitcoin and ether. 

But if you do want to invest in smaller altcoins, there are things you can look at to evaluate them in terms of long-term investment potential. They include price, market cap, use cases, and even who created a particular currency. 

If you’re interested in XRP, here are your options for how to buy it.

What Is XRP?

XRP launched in 2012, and was created by three developers who aimed to improve on the sustainability and mining process of bitcoin. The network code was originally referred to as Ripple, with the cryptocurrency being called XRP Ledger. The creators would later help form a company called Ripple Labs, which was gifted 80 billion XRP. 

Ripple was invented to be an open-source decentralized alternative for sending money via the traditional banking system, which frequently adds layers of processing fees to each transaction. According to Ripple’s website, you can send XRP from one digital wallet to another in just 3 to 5 seconds while paying minuscule fees.

Pro Tip

XRP isn’t available to buy on most U.S. crypto exchanges, but you can hold it in a noncustodial wallet such as Exodus or MetaMask. 

Steps to Buy XRP

XRP isn’t available on most U.S.-based crypto exchanges. That could possibly change if the outcome of the SEC lawsuit reveals that XRP is a currency, not a security. However, if the SEC wins, you may have to go out of the country to buy XRP.

Here are some steps to get it now.

Find a Cryptocurrency Exchange

You won’t be able to buy XRP without jumping through some technical hoops on popular mainstream exchanges like Coinbase, Gemini, or eToro. You can still find it on more obscure exchanges such as Uphold, or you can make your purchase outside the U.S., or take your chances on a decentralized exchange. Experts say it’s typically best for investors to stick to more mainstream exchanges, so do your research and proceed with caution before buying through a lesser-known exchange.

Workarounds for Buying XRP With U.S. Dollars

While it’s challenging to buy XRP in the U.S., you can still technically buy it with U.S. dollars (USD).

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CoinMarketCap lists which exchanges allow you to trade USD (as well as other fiat or cryptocurrencies) for XRP, but note that these won’t all allow you to buy it in the U.S.

Here’s how to find the list: 

  1. Go to CoinMarketCap.com
  2. Search for XRP using the search bar in the upper right hand corner (on desktop view).
  3. Click on the “Market” button at the top of the price chart. 
  4. See the complete list of exchanges and website where you can purchase XRP.
  5. Notice under the column labeled “Pairs” the ticker symbol for XRP, plus a second type of currency. These pairings are all the ways you can buy XRP. To purchase XRP with the U.S. dollar, look for XRP/USD. To purchase XRP with Tether, look for XRP/USDT.

Keep in mind that you still may have to make the transaction outside the U.S. to buy XRP, even when using USD. For instance, Bitstamp is on CoinMarketCap’s list of places to buy XRP. However, when you visit the Bitstamp website, it says: “Not available in US.”

You may be able to trade certain cryptocurrencies for XRP using a decentralized exchange (DEX) like Pancake Swap, which is unregulated. A note of caution, however: DEXes and decentralized finance (DeFi) in general have no safety guards and involve advanced knowledge of trading concepts like lending, staking, and pooling. 

For most new crypto investors, it is probably best to wait until this whole lawsuit shakes out. You might have an easier time after things have settled, when XRP could be easier to buy and a safer investment overall.

Storing Your XRP

You can store your XRP in some centralized exchanges like Coinbase, though you will not be able to transact with it while inside the U.S. If you do manage to buy XRP, or already have it, consider putting it in a hot or cold crypto wallet where it will be less susceptible to hacks. 

What Can You Do With XRP?

XRP was built as a bridge currency to connect financial institutions such as banks, payment providers, and digital asset exchanges to help settle transactions in real time while cutting down on costs.

“The underlying value proposition [of XRP] is essentially that you can have many, many, many transactions at a very, very small cost,” says Jonathan Angle, an instructor for the online DeFi school YieldFarming.com.

However, XRP’s speed and efficiency is most significant to companies and platforms within the financial services industry. Everyday investors may want to buy XRP because they believe it will become more widely adopted, and therefore valuable, in the future. Unlike Ethereum and other smart contract blockchains, XRP isn’t used for nonfungible tokens (NFTs), gaming, metaverse purchases, and other fun applications. Owning XRP doesn’t have the same applications as owning ETH.

Best Wallets for Holding XRP

Most experts recommend using a self-custody wallet to store large amounts of crypto long term. Self-custody wallets are more secure than keeping crypto stored on a public exchange. If you’re planning to hold your XRP for a while, you might want to consider moving it into a wallet that you personally control. 

Self-custody wallets use private keys that allow you to securely access your digital assets. Every private key is linked to a public key that’s used like a digital address from which crypto can be sent or received. You’ll also have a unique seed phrase that’s used to unlock or sync your wallet to new devices, or restore your password when needed.

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Examples of self-custody wallets include Exodus and MetaMask, says Angle. “They allow you to create a blockchain address using their software. You write down your seed phrase, you make sure to keep that secure and secret,” he says. 

Is XRP Worth It?

While XRP is promising for the financial services industry, individuals don’t stand to benefit a whole lot from owning it.

For starters, Ripple’s speed may arguably come at the price of security. “There’s essentially a trade-off,” says Angle. “It has many less validators on the network.”

Fewer validators means fewer computers checking and processing the accuracy of transactions. And if just half of the validators were to get hacked, your crypto could easily get stolen. More validators on a network means a higher layer of security, because hackers would have to break into more computers.

But is XRP worth it? “I do find a lot of new entrants into the crypto space are very interested in Ripple,” Angle says. “They’ve really got a good marketing appeal … But unfortunately, since [it] doesn’t have functional smart contracts [like Ethereum] … there’s not really the same sort of applications or opportunities. Most of my colleagues and clients aren’t tremendously interested in [XRP].”

Experts recommend you don’t invest any more than 5% of your portfolio in cryptocurrency, and don’t invest any money you can’t afford to lose. This is especially true of altcoins. If you’re going to start this crypto journey, make sure you’ve got a solid emergency fund, have paid off any high-interest debt, and have a secure retirement fund. 

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Here’s A Perk You Should Look For In A Mortgage Lender, According To Two New Homeowners

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Here’s A Perk You Should Look For In A Mortgage Lender, According To Two New Homeowners

Fred Miller (left) and Tessa Sliwa both appreciated how quickly their mortgages closed when they worked with Better Mortgage recently.

Better paid for the creation and placement of the content on this page. It does not necessarily reflect the editorial views of NextAdvisor or any of its affiliated entities.

In a competitive housing market, timing is everything — you have to move quickly on opportunities. Closing on time is a must, especially when there are multiple offers. 

Two key factors can make a big difference when it comes to a smooth and speedy closing: having a stellar real estate agent and working with a lender that takes the stress out of the process.  

Plenty of lenders will promise to move fast when it comes to closing, but in a tough housing market like we’re in right now, the ability to follow through on that promise is more important than ever. That’s why the approach of online lender Better Mortgage is so notable: Better’s promise comes backed by a $2,000 payment if your loan doesn’t close on time, thanks to the Better Mortgage Closing Guarantee. 

“Better is great for people who live busy lives,” says Tessa Sliwa, who recently closed a loan with Better Mortgage in Austin, Texas, a notoriously hot market.

What Is the Better Mortgage Closing Guarantee?

The Better Mortgage Closing Guarantee means you’re more likely to close on time — after all, timing is everything when it comes to homebuying, especially in this market. If your loan is delayed or has issues that prevent you from closing on time, you’ll get $2,000 from Better Mortgage. 

The Closing Guarantee is another example of how Better Mortgage is changing the mortgage game, along with things like getting rid of commissions and origination fees, offering on-demand rate locks, and providing instant loan estimates — all completely online. The streamlined application can pre-approve borrowers in minutes, and is available in 47 states and Washington, D.C. Better Mortgage is a highly rated mortgage lender by NextAdvisor, which cited its unique borrower incentives and streamlined online platforms.

Here’s how two recent homebuyers benefited from the Better Mortgage Closing Guarantee when they got their home. 

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Convenience Goes a Long Way

Tessa Sliwa and her fiancé Benjamin bought a home in Austin, Texas, which is a notoriously hot housing market where homes sell quickly.

Sliwa didn’t have the time for in-person meetings and long phone calls, but wanted a mortgage with a low interest rate, fast closing, easy-to-use technology, and support whenever she needed it. She and Benjamin looked at both traditional and non-traditional options before personal recommendations led her to Better Mortgage.

Sliwa also liked the Better Price Guarantee, which matches a competitor’s offer and gets you a $100 credit toward your Better Mortgage loan. If Better Mortgage can’t match the offer, the money is yours to keep. Sliwa says Better Mortgage proactively offered the Price Guarantee when she initially reached out. 

But there was no haggling with her loan, and she liked the speed of responses. The convenience, she said, is what really won her over. 

Team members reached out and explained they’d guide her through the process and close on her deadline. “The whole process was outlined,” Sliwa says. “There was a checklist. That became very convenient when it came time to close.” 

Friends of hers that were buying a home around the same time missed their closing date because the mortgage company didn’t pull through. But Sliwa closed on time . 

In a hot market, that’s a huge relief. And with the Better Mortgage Closing Guarantee, knowing you get something if your closing doesn’t happen on time provides some comfort. Not having to use the feature is even better, but knowing you get something if your closing doesn’t happen on time provides some comfort. 

Why would Sliwa recommend Better Mortgage? Three things, she says: quick communication, ease of the overall process, and they make you feel good that you’re going to make your closing date. 

Sliwa and Benjamin got engaged in their new home soon after their closing. “This house will for sure always have a very special place in my heart,” Sliwa says. 

Simplicity Means Everything

Fred Miller, a retired financial advisor and Air Force veteran, bought a home along the St. Clair River in his hometown of St. Clair, Michigan, during the pandemic. “[The house] fit my needs perfectly because it’s a small home and not a lot to maintain. And the price was right because it’s the smallest one in the neighborhood, which is kind of cool. I like that a lot.” 

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But the 79-year-old Michigan native originally wasn’t so sure a traditional lender would give him a 30-year mortgage. That’s when he went to Better Mortgage. 

Miller says he was able to complete the entire process online, and was impressed by the simplicity of the experience. He started with a pre-approval, “and then it was a matter of getting the proper documentation back and forth.” 

“In 30 days, we closed the loan and bought the house. That’s incredible.” 

Not only did Miller get his mortgage through Better Mortgage with no upfront closing costs, but he also got homeowner’s insurance through Better Coverage, a sister company in the Better family of brands. 

“I had a mortgage in 30 days,” he said. “I couldn’t have done it without Better — that’s for sure.”

Had his loan not closed on time, he could’ve been covered by the Better Mortgage Closing Guarantee, which says you’ll close on time or get $2,000. More information on the closing guarantee and its terms can be found on the Better Mortgage website. 

Miller says buying the home has brought him peace and reflection after the recent loss of his wife, which was the catalyst for him to downsize to a smaller home. He spends the evenings watching the boats go by on the river and contemplating his next chapter.

Bottom Line

When you’ve found the house of your dreams, it’s imperative to act quickly with an offer. 

“You want to pick [a lender] that’s going to be able to explain things to you,” Sliwa explains, “but also be at the same pace as you.”

Ultimately, she says, you want someone you can rely on. That, combined with the customer service support, made her feel confident about getting to the closing table, prepared and on time. 

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Miller said closing so quickly gave him a lot of relief. “I got the house, and I came home and looked around and said, ‘My new home.’ Just where I wanted to be.”

With the Better Mortgage Closing Guarantee, you can start shopping for a home — rest assured knowing a team of mortgage professionals is working hard to get you to the closing table on time. 

(Better Mortgage Corp. NMLS # 330511)

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Here’s How This Borrower, With $170,000+ In Student Loan Debt, Is Taking Advantage Of The Latest Freeze Extension

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Here’s How This Borrower, With $170,000+ In Student Loan Debt, Is Taking Advantage Of The Latest Freeze Extension

Courtesy of Marielle Tomlin

Marielle Tomlin has taken advantage of student loan freeze extensions to make extra payments toward her $170,000+ debt balance.

We want to help you make more informed decisions. Some links on this page — clearly marked — may take you to a partner website and may result in us earning a referral commission. For more information, see How We Make Money.

Marielle Tomlin has taken advantage of student loan payment freezes to pay off over $50,000 in student loan debt. And she’s excited to have an extended opportunity to continue chipping away at her student debt.

The Biden-Harris Administration has extended the pause on payments, interest, and collections through Aug. 31, 2022. The latest freeze gives Tomlin, and millions of others with student loans, a fresh reprieve from the burden of monthly payments. 

Now is a great time to take advantage of the additional financial flexibility, but don’t count on it being a permanent situation because experts don’t believe blanket student loan forgiveness is likely.

Not having to pay interest has energized Tomlin and allowed her to fast track paying down her $170,000+ in student debt. This has motivated her to keep paying more, she says. Tomlin started off paying $500 a month and kept bumping it up from there, putting large chunks of the money she made from her midwifery practice toward her student loans. “I kinda feel like I’m racing the clock until the [no interest period] and the pause is all done,” she says.

If you’re taking advantage of this student loan freeze, here’s what you need to know about the pause and how to take advantage of it.

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There’s a ‘Fresh Start’ for Those Struggling to Make Payments

During the student loan payment freeze borrowers who were behind on payments have had all collections paused. With this latest extension, there are plans to help borrowers who are behind on payments by eliminating delinquency and default status on loans. This is a big deal that will allow somewhere around 8 million borrowers to essentially have a fresh start, says Adam S. Minsky, an attorney specializing in student loan law.

At this point, the government has yet to provide details on what this will look like and how it will work. Once this plan is put into action, it could be a boon for borrowers’ credit scores, greatly improving the chances of qualifying for a mortgage or securing a lower interest rate for all types of loans. 

However, what we don’t know is whether or not the changes in delinquency or default status will be automatically reported to the credit bureaus. If the government doesn’t release an automatic correction to your credit report, borrowers can self-advocate by writing dispute letters to their servicer and the credit reporting bureaus, says Catalina Kaiyoorawongs, co-founder of the student debt financial wellness platform LoanSense. “In some cases, your credit score can be increased by over 100 points,” she says.

How Experts Recommend Approaching This Payment Freeze Extension

Having flexibility with your student loans and not having to worry about interest accruing gives you some options. “The first thing I would have that person ask themselves is, how can I make the most of this?” says Anna N’Jie-Konte, a financial advisor and founder of Dare to Dream Financial Planning.

Here’s what the experts are saying about what you need to know about the student loan payment freeze and strategies for taking advantage of it.

Don’t Count on Blanket Loan Forgiveness

You may have extra room in your budget right now, but experts say you shouldn’t make long-term financial decisions based on that. You don’t want to commit yourself to a higher mortgage payment when you’re saving $100 or $1,000 a month by not paying student loans because, “that suddenly becomes a problem once those [student loan] payments restart,” N’Jie-Konte says.

The experts we talked to believe that total forgiveness of all federal student loan debt is unlikely to happen. It’s possible there will be some form of limited relief or an expansion of existing programs, but even that is up in the air. “I don’t think [Biden’s] going to wipe out everyone’s student loan debt, but there could be some sort of broader student loan forgiveness initiative of some kind,” Minsky says. “The administration has confirmed that that’s still under consideration.”

The Public Service Loan Forgiveness program (PSLF) has already been overhauled to enable a larger number of borrowers to qualify. For those with an eligible public service job (teacher, firefighter, nurse, etc.), a wider range of federal loans and repayment plans will count toward the PSLF requirements. If you qualify, you’ll need to apply for this limited waiver by Oct. 31, 2022.

Supercharge Your Other Financial Goals

This could be a good time to save for a down payment for a home, jump start your child’s college education fund, or pay down high-interest credit card debt. “I had one client, I think he’s paid off $50,000 in credit card debt in the last two years,” N’Jie-Konte says. She has also seen people use the extra cash as seed money for a business. “I think a lot of people are using it to fund their dream projects.”

Tomlin is taking advantage of this interest-free period to rapidly pay off her school loans. Once she’s paid off her student debt she’ll be free to work less or expand her midwifery business by hiring another midwife. “I’ll be way more flexible once my loans are gone,” she says. 

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Understand How It Impacts Getting a Home Loan

Any debt will limit your ability to qualify for a mortgage and reduce the amount you can borrow by increasing your debt-to-income ratio (DTI). But student loans have a unique and complicated relationship with your mortgage application.

If your student loans are in active repayment, then your monthly payment amount is counted toward your DTI. This is true even if you have lower payments because you’re taking advantage of an income-driven repayment (IDR) plan.

However, the calculation changes if your payment is zero, which is currently the case for many borrowers. A lot of borrowers automatically assume because they’re not paying it, that the lender won’t count it, and that’s far from the truth, Kaiyoorawongs says. In that scenario, a percentage of your student loan balance is factored into your DTI. This percentage varies by loan type, but is typically 0.5% to 1% of your total loan balance. This means that for certain borrowers, not having your student loans in repayment staus can actually hinder your ability to purchase a home.

For an FHA loan the maximum DTI is generally 43%, a family making $6,000 a month could have up to $2,580 in monthly debt payments (including the future mortgage payment). If this family has $100,000 in student loans and the loans currently aren’t in repayment, then 0.5% of the loan balance counts toward their DTI, which would be $500.

In this scenario, the family might be able increase their purchasing power by putting their student loans into active repayment. If they qualified for an IDR plan with a payment of $250 a month, here’s what that would look like for a 30-year loan with a 5% mortgage rate:

Student Loan’s DTI Impact Maximum Mortgage Payment Maximum Mortgage Amount at 5% over 30 years*
With $0 Payment $500 $2,080 $345,200
With IDR $250 $2,330 $386,700
*According to the NextAdvisor mortgage calculator

It may sound counterintuitive, but by restarting student loan payments, some borrowers can increase their homebuying budget. And once you’ve closed on the home, you can still take advantage of the freeze on federal student loan payments. “You only have to pay [student loans] for one month. You can put yourself in pause again,” Kaiyoorawongs says.

Whether or not this strategy makes sense for you depends on your personal situation. You can apply for IDR at Studentaid.gov.

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