The possibility of student loan forgiveness is no longer in question.
On August 24, 2022, the Biden administration canceled $10,000 in student debt for all borrowers who earn less than $125,000 per year ($250,000 per household), while canceling $20,000 for borrowers who previously received the Pell grant.
This news made headlines, but the Department of Education has also extended the administrative forbearance that freezes interest rates and payments for federally held student loans until December 31, 2022. It This was the seventh – and would be final – such extension since the pandemic began in 2020.
So what does it mean if you still have student debt?
Depending on your loans and your financial situation — and whether the $10,000 forgiveness wiped out your loans completely — you might be better off making larger payments right now…or not at all.
Don’t worry, we’ll explain.
7 questions to ask before you stop paying student loans in forbearance
Before we start celebrating the disappearance of your student loans, let’s take a reality check and see how forgiveness might affect you and what steps you should take.
1. Should you make payments if you have both federal and private student loans?
If you have a combination of private and federal student loans, your best strategy may be to use the money you would normally pay for your federal loans to pay off more private loans that are still actively earning interest.
Not all student loans are eligible for forbearance – and it is highly unlikely that they will all be eligible for forbearance.
Forbearance covers all loans held by the U.S. Department of Education, which includes Direct Loans, Subsidized and Unsubsidized Stafford Loans, Parent and Graduate Plus Loans, Consolidation Loans, and Defaulted FFEL Program Loans .
If you have private student loans, these loans are not covered by the administrative forbearance period and there is almost no chance that they will be wiped out by a mass pardon.
2. How might your balance be affected by canceling a student loan?
If you owe more than $10,000 in student loan debt, you should aggressively save additional money to reduce the balance that remains after the forgiveness takes effect and the forbearance ends.
But that doesn’t necessarily mean you should write checks every month, just yet. It might not earn you much interest, but if you can put the amount you plan to pay for your student loan into a high-interest savings account, you can withdraw it closer to the date. forbearance limit and repay as much as you can. of the principal of your student loan.
What if you have less than $10,000 in student loans and earn less than $125,000 a year? So congratulations. No more student debt for you!
3. What should you do if your loans were in default before the pandemic?
The latest forbearance extension included a significant change for borrowers who were in default at the start of the pandemic: the government will allow defaulting borrowers to repay in good standing so they don’t have to preempt the resumption of business recovery – including garnished wages and tax refunds – as the deadline approaches.
It’s a big reprieve, but don’t wait. Contact your loan servicers now, especially if your income has changed during the pandemic. Learn about income-contingent repayment plans so you’re ready to resume payments when the forbearance period ends and avoid falling into default again.
If you have a balance after $10,000 of your debt has been cleared, you still have work to do. And since you previously had problems making payments on time, you should start planning now to eliminate that remaining debt.
If you default on student loans again after the forbearance ends, the loans can be sent to collections, and your wages, tax returns, and Social Security benefits can be garnished for up to 15% for repayment.
4. Should you wait for student loan forgiveness if you are on the PSLF track?
If you are applying for public service loan forgiveness – you have a direct loan, you are on a qualifying repayment plan, and you work for a qualifying employer – then you can and should take advantage of the relief period by not doing any payment.
Those zero-dollar payments still count toward your total for forgiveness, and if your loans are canceled during that time, great. In fact, the Department of Education announced in January that up to 550,000 borrowers would see their loans “accelerated forgiveness”.
But if you’ve lost your job or your hours have been reduced to less than the 30-hour minimum, your nonpayments won’t count toward the discount (but you still don’t have to pay during the forbearance period).
PSLF does not require consecutive payments, so you can always suspend payments if you think you will return to your public sector or nonprofit job.
However, if you think you are unlikely to return to eligible employment, you can take advantage of the forbearance period to start repaying the loan. At the very least, you should update your income (if you lost your job) on your income-driven repayment plan.
5. How does your degree affect your chances of a pardon?
If you’ve taken out loans to get a graduate degree, don’t expect to qualify for any type of student loan forgiveness.
“People with higher degrees are unlikely to get a massive pardon, if any, from the government, because you’re seen as part of a society that has greater upward mobility,” said Steve Muszynski, founder and CEO of Splash Financial, a student. loan refinancing market.
Graduate loans are also likely to have higher interest rates, which means the forbearance period is a good time to reduce that debt.
However, as with all loans held by the federal government, it’s probably best to keep them rather than refinance them into a private loan, according to Betsy Mayotte, president of the Institute of Student Loan Counselors, a nonprofit organization. non-profit organization that provides students with free credit counseling and dispute resolution assistance to borrowers.
Besides the income-driven repayment plans and rebate programs already in place, you would lose this interest-free period.
“I meet a lot of people right now who are kicking themselves because in the last two years they refinanced their federal loan privately,” she said. “They’re begging for a way to take him back, and you can’t.”
6. How close are you to retirement?
If you’re nearing retirement and repaying student loans, whether they’re your own or those you took out to pay for your children’s education, forgiveness can help you erase some of your loans. . Focusing on saving as much as possible for retirement will only help you more during this time of forbearance.
“Retirement should always come first in deciding where your money goes,” Mayotte said.
But relying solely on forgiveness probably isn’t the best strategy if you have more than $10,000 in loans or have taken out loans to get an advanced degree. In this case, you should start preparing for a future on a fixed income by aggressively paying off your student debt and considering an income-oriented repayment plan.
“Understand that you might be 80 when the loan finally runs out, but at least the payments will be affordable and [they’re] is not going to change,” Mayotte said.
7. What does the rest of your financial situation look like?
All of these strategies for getting the most out of your money may not mean much if you’re struggling to pay the bills. If you’re in a situation where you need money to meet your basic needs, take advantage of the forbearance period to get back on your feet and start building an emergency fund.
4 steps to take before forbearance ends
- Find out who your loan managers are and how much you owe. Do it now – some repairers have given up during the pandemic and you’ll want to make sure your lenders have your up-to-date contact details. You can call the Federal Student Aid Information Center at (800) 433-3243 and check out this guide to help you get organized.
- Determine if you can make payments when they need to resume. Otherwise, enroll in an income-driven repayment plan. Do this as early as possible, as there will likely be a lot of people trying to apply – and could overwhelm the system – as the deadline approaches.
- Make payments for yourself. Save what you would have used for payments for the time being. When forbearance ends in December, make a lump sum payment for your student loan before the deadline. This way, you will receive credit for the repayment of any principal amount before interest starts to accrue again. Even better, if your student loan has been completely forgiven, you’ll have a nice amount of money to spend on a down payment on a house, build up an emergency fund, or invest for even more income.
- Even after the pardon, you may still owe money. The federal government may not tax the amount forgiven on federal student loans, but your state might consider the amount forgiven as income. Save your money now, just in case.
Tiffany Wendeln Connors is associate editor of The Penny Hoarder. Robert Bruce is a senior writer.
This was originally published on The Penny Hoarder, a personal finance website that empowers millions of readers across the country to make smart decisions with their money with practical, inspirational advice and resources on how to earn, save and manage money.