By Cecilia Clark
Whether you need smaller payments, want to pay them back faster, or work in the public service, make a plan now before the holidays.
This article is reprinted with permission from NerdWallet.
According to an August press release from the White House, twenty million people, or nearly 45% of federal borrowers, will see their debt wiped out by the cancellation of President Joe Biden’s student loan. However, for the 23 million borrowers who still have debt, now is the time to develop a repayment plan.
“January will be here before you know it,” says Damian Dunn, certified financial planner and vice president of corporate financial wellness platform Your Money Line.
Payments resume in January 2023. But, Dunn says, with the holidays coming up, by January, spending and borrowing time are the biggest for many people. As a result, many borrowers can be overburdened in January if they don’t plan now.
They won’t just pick up where they left off in March 2020, when payments and interest were halted. Payment amounts and options may vary.
Borrowers can expect the remaining balance of their loan to be re-amortized after cancellation. This means that their cancellation amount, either $10,000 or $20,000, will be deducted from the total they owe. Their payment term will not change, but they will receive a new monthly invoice based on the recalculation of the remaining balance. Many borrowers will see a smaller bill as a result.
Here’s what to do next.
If you work in the public service
Prioritize Public Service Loan Forgiveness Waiver, or PSLF, if your job makes you eligible. The Department of Education can count more payments toward the 120 needed for pardon under the waiver. This means you could see full forgiveness much sooner.
The last day to apply for the waiver is October 31.
You can still apply for the PSLF after the waiver ends, but the terms won’t be as generous.
If you are comfortable with your regular payments
If you made regular payments during the pandemic pause without financial strain, keep doing it. Continuing to pay during the pandemic means you saved money because your dollars went straight to the main balance.
However, if you haven’t made payments during the pandemic, start setting aside your payment amount now to make sure it will fit into your budget. By doing so, you could pay a three-month lump sum once payments resume.
If your student loan bill is smaller after the cancellation is applied, continue to make your original payment if you can. This way, you’ll save money on interest charges and pay off your debt faster.
Making room in your finances gives you time to adjust your budget if necessary. But you have other options if you can’t make it work.
Read: Have your student loans been forgiven? Here’s where to put some of that extra cash now
If you need small monthly payments
If you know you’ll have trouble making your monthly payments, contact your servicer to discuss income-based reimbursement, or IDR, options. Four income-driven repayment plans currently set your payout at 10% of your Discretionary Income. Payments could be set at $0 if your income is low.
These plans also wipe out your remaining balance after 20 or 25 years.
Borrowers can also expect a new income-based repayment option, announced alongside the cancellation. The new plan will reduce the amount of income considered discretionary and halve the payout percentage to 5%. It will also reduce the forgiveness period to five years for those whose original total loan balance was $12,000 or less.
As unpaid interest continues to accumulate and capitalize under existing plans, the government will cover unpaid interest with the new IDR. That means borrowers who want to cut their monthly payments — potentially by half or more — and who don’t mind extending their repayment term could benefit the most from the new plan.
However, high-income borrowers may not see lower payments with income-driven repayment.
Related: Moving forward with federal student loan relief — what’s next?
If you want to pay off your debt faster
If you want to pay off your debt faster and don’t want to refinance with a private lender, the best strategy is to:
Consider refinancing if you have private student loans or federal debt carrying higher rates.
Student loan refinance rates have increased, but borrowers with the strongest credit profiles can still find a lower rate.
Borrowers should not refinance until at least 2023 – once the cancellation is applied to their account and the interest-free forbearance is over. If you refinance, your federal student loans will become private and will no longer be eligible for federal benefits, like forgiveness and IDR.
The decision to refinance should come down to long-term financial benefit, says Clark Kendall, certified financial planner and president of Kendall Capital Management. For example, if you can go from a 7% rate to a 5% rate, you can save that 2% or increase your 401(k) contribution.
Dunn also warns borrowers to consider their risk of losing federal benefits. “I would double-check the math and make sure you’re in a better position,” he says. “Maybe a slightly lower payout doesn’t outweigh the overall benefit of having federal protections.”
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Cecilia Clark writes for NerdWallet. Email: [email protected]
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