The Biden administration is due to decide whether to extend or end the payment pause on federal student loans at the end of the month. As August 31st approaches, millions of student loan borrowers across the country face uncertainty, unsure of what their repayment structure will look like going forward.
With more than 40 million Americans carrying a combined debt burden totaling over $1.6 trillion, student loans are a hot-button issue. With a deteriorating economy, rising inflation, climbing interest rates, and a cooling job market, repaying student loans could become even more challenging for borrowers across the nation.
“With there being very little guidance or clarity around student loans and the end of the administrative forbearance on August 31st, 2022, borrowers are feeling a little anxious,” Michael Acosta, Financial Planner at Consolidated Planning, reports.
Acosta and other financial advisors shared their thoughts on how borrowers should approach the next few months.
The current policy began in response to the economic turbulence brought by the COVID-19 pandemic. From March 27th, 2020, loan interest rates have been kept at 0%, and payments paused.
While some expect the President will likely hold back from restarting the loan payments, advisors say it is prudent to prepare.
“Extension of the repayment pause is highly likely. But it's always a good idea for borrowers to plan for future payments anyhow,” Cecil Staton, President and Wealth Advisor at Arch Financial Planning, told us.
“Borrowers with Federal student loans need to review whether they're on track to obtain public service loan forgiveness, taxable loan forgiveness, deferment, or forbearance,” he said. “If the goal is to pursue public service loan forgiveness or taxable loan forgiveness, they need to decide which repayment plan (such as IBR, ICR, PAYE, or REPAYE) is best-suited for their situation.”
Acosta recommends that borrowers look ahead and contact their loan servicer to work out minimum monthly payments for September, assuming payments do actually resume. He also suggests they recall how they used to handle their debt before the pandemic pause began.
“They should revisit their budget. Most borrowers did one of three things with their student loan payment pre-pandemic: (1) They started saving it, (2) they allocated it toward other debts, or (3) it was absorbed by their lifestyle,” he said.
Forgive and Forget?
Yet the US government may waive some of the outstanding student debt for millions of Americans. President Biden is reportedly mulling an executive order to forgive $10,000 of debt per borrower.
Last month officials at the Education Department finalized a plan for mass debt cancellation, which they are ready to implement at the President's orders. Under the plan, all federal student loan types would be eligible for debt relief, including Grad, Parent PLUS, as well as federal loans owned by private firms.
However, the final details are yet to be announced.
“Student loan forgiveness will likely help a large portion of the population navigate extremely high levels of student loan debt,” said Grant Maddox, financial planner and founder of Hampton Park Financial Planning.
“However, while student loan forgiveness may go through, the discussed amounts are not total and complete. The likelihood of student loan forgiveness is limited to $10,000 per borrower is high, and consumers should consider this when not making payments on their student loans.”
If forgiveness occurs, some advise borrowers to take the opportunity to find a more productive outlet for their money than repayments.
“As long as the repayment pause is active and the possibility of mass student loan forgiveness exists, borrowers should not pay off their loans or refinance,” Staton said.
“Since interest doesn't accrue during the repayment pause, the opportunity cost of your money used towards student loan repayment may have a better use. An excellent example is investing in the stock market during a decline. ”
However, those who borrowed through private firms may not have this advantage.
“The Biden administration's mass student loan forgiveness and repayment pause are for Federal student loans only. Therefore, refinancing to private doesn't make sense in the interim,” said Staton.
Federal vs. Private
Borrowers who took out their student loans through private firms rather than the federal government face different loan conditions. They may need to adjust their approach to handling the debt accordingly, with an eye on rising interest rates.
“If you took out loans from a private lender, it may have a variable rate. In this case, your interest may go up,” explains Nathan Mueller, Financial Coach at BlackBird Finance.
“If you've thought about refinancing federal student loans with a private lender, you may find their rates have gone up. This means it is no longer advantageous,” he added.
Other advisors say it doesn't hurt to shop around for better rates. Some say debt consolidation, also known as refinancing, may help lighten the load as the economy slows.
“Now is an excellent opportunity to consider lowering your monthly payment through consolidation,” said Maddox.
“Consolidation may also lower your overall interest rate. Lastly, you may also be eligible to change your payment plan to a more favorable income-driven repayment plan or another repayment plan more in line with your long-term goals.”
The road to debt-free living is long and arduous for millions of Americans. While the prospect of a further payment pause or even mass loan forgiveness could lighten their load, borrowers must be realistic and be prepared for any eventuality. That timeless investment adage, “Hope for the best, plan for the worst,” also holds true for student debt.
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