Student Debt: Why Borrowers Should Make a Plan for When Repayment Resumes for Federal Student Loans

The Biden administration recently extended the suspension in student loan repayments on federal loans until the end of August of 2022. This is the sixth extension since the pause was first introduced in March of 2022 as the impact of the pandemic first set in. This pause in payments also includes a pause in the interest accrual on these loan payments.

The New York Federal Reserve estimates that this suspension has impacted some 37 million borrowers, saving them $195 billion in waived payments.

For many Americans with student loan debt, this suspension of payments has helped them cope with reduced income and higher costs brought on by the pandemic. For some, the combination of higher prices due to inflation and job losses has been tough. The relief from student loan payments has been helpful to these folks. The suspension in payments also includes a suspension in collection efforts on delinquent loans and on the offset of Social Security payments for those with delinquent payments.

The fact that there is a pause in the accrual of interest payments as well is a big plus. This means that the balance will not have grown for those borrowers who have decided not to make payments during this pause.

Why you should make a plan for when repayments resume

If you have taken advantage of this pause in payments over the past couple of years, your monthly budget may have gotten used to having this extra money to spend. Even if you were not hit by financial hardship as a result of the pandemic, it can still be an adjustment to have to make this monthly payment once payments resume.

While there are some who want to cancel student loan debt for all or some borrowers, you can’t assume this will happen. Even if it does happen, we don’t know which borrowers will be covered. There might be income restrictions or other restrictions on eligibility for any forgiveness.

While there is still time to prepare for the potential resumption in payments in September, you should start making adjustments to your budget. Perhaps you should consider setting aside the amount of your payment in a savings account to get used to having less to spend. Or consider diverting that amount to paying down other debts, such as a car loan or credit card balances, if applicable to your situation.

Should you wait to pay your student loans?

Another option is to resume making your student loan payments prior to the resumption in mandatory payments. This is a good way to reduce your debt even further than normal with the waiver of interest on the payments.

Making payments now will result in a lower balance once payments resume and will save on your total interest costs over time. A recent article in the Wall Street Journal documented a number of success stories of student loan borrowers who continued to make their loan payments resulting in substantial reductions in their loan balance or, in some cases, even a full repayment of their loans.

Another option is refinancing your student debt to a lower cost loan. There are a number of companies that specialize in refinancing student loan debt. If you decide to go this route, you might consider refinancing private student loans that are not eligible for the payment suspension and potential loan forgiveness if enacted by Congress at some point in the future.

Refinancing these private loans could result in lower payments and lower interest rates, making it possible to pay off your balance sooner.

Where does student loan forgiveness stand?

As you might suspect, there is a division largely along party lines with the Democrats largely supporting forgiveness and Republicans largely against it. What form, if any, a student loan forgiveness program might take remains to be seen. Some proposals call for partial forgiveness, others have limits based on the borrower’s income.

Since we don’t know what the future holds as far as any sort of student loan forgiveness or if the suspension of payments will be continued, this is the time to make a plan to deal with your student loan debt. For those who are able to do so, this is a great time to pay down this debt in conjunction with the suspension of the interest accrual on this debt. This will allow you to move past this debt and divert this money towards investing in your future sooner than you might have thought possible.

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