You get some student loan debt paid off, but what about the rest?

By Cecilia Clark

Whether you need smaller payments, want to pay them off faster, or work in the public sector, start planning now before the holidays

This article is reprinted with permission from NerdWallet.

According to an August White House press release, 20 million people, or nearly 45% of federal student loan borrowers, will see their debts paid off by President Joe Biden’s student loan cancellation. Now is the time for the 23 million borrowers with debt to come up with a repayment plan.

“January will be here before you know it,” says Damian Dunn, a certified financial planner and vice president of corporate financial wellness platform Your Money Line.

Payments will resume in January 2023. But, Dunn says, with the holiday season looming, between now and January is the peak spending and lending season for many people. As a result, many borrowers could be overwhelmed in January if they don’t plan now.

They will not simply pick up where they left off in March 2020 when payments and interest stopped. Payment amounts and options may vary.

Borrowers can expect their remaining loan balance to be repaid after termination. This means that your cancellation amount, either $10,000 or $20,000, will be deducted from the total amount owed. Your payout time will not change, but you will receive a new monthly bill based on the balance recalculation. Many borrowers will see a smaller bill as a result.

Here’s what to do next.

If you work in public service

Prioritize completing the Public Service Loan Waiver (PSLF) if your job qualifies you. The Department of Education may count further payments toward the 120 required for forgiveness under the waiver. That means you can see full forgiveness much sooner.

The last day to apply for the exemption is October 31st.

You can still apply for PSLF after the waiver expires, but the terms are not as generous.

If you are happy with your regular payments

If you’ve been making regular payments during the pandemic hiatus without any financial strain, continue to do so. Keeping payments going during the pandemic means you saved money because your dollars went straight to the main balance.

However, if you haven’t made any payments during the pandemic, start putting your payment amount aside now to make sure it fits back into your budget. That way, you could pay a three-month lump sum once payments resume.

If your student loan bill is smaller after cancellation, continue to pay your original payment amount, if possible. This saves you interest costs and pays off your debts faster.

Making room in your finances gives you time to adjust your budget if needed. But you have other options if you can’t get it to work.

Read: Have Your Student Loans Forgotten? Here’s where you can invest some of that extra money now

When you need smaller monthly payments

If you know you’re going to have trouble making your monthly payments, contact your servicer to discuss options for an income-related payback, or IDR. Four income-based repayment plans currently set your payment at 10% of your discretionary income. Payments can be set to $0 if your income is low.

These plans also wipe out your remaining balance after 20 or 25 years.

Borrowers can also look forward to a new income-based repayment option that will be announced along with the termination. The new plan will reduce the amount of discretionary income and halve the payout percentage to 5%. It will also shorten the time to forgiveness to five years for those whose original total loan balance was $12,000 or less.

While unpaid interest under existing plans will continue to accrue and be capitalized, 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 don’t mind extending their repayment period could benefit the most from the new plan.

However, high-income borrowers may not see lower income-contingent repayment payments.

Related: Pushing Federal Student Loan Forgiveness — What’s Next?

When 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:

Consider refinancing if you have personal student loans or federal debt with higher interest rates.

When refinancing a student loan, borrowers replace their existing loan with a new one. Ideally, the new loan has a lower interest rate and more favorable repayment terms.

Student loan refinance rates have increased, but borrowers with the strongest credit profiles may still be able to find a lower interest rate.

Borrowers should not refinance until at least 2023 — once termination has been applied to their account and interest-free forbearance has ended. When you refinance, your federal student loans become private and no longer eligible for federal benefits such as forgiveness and IDR.

The decision to refinance should be based on long-term financial benefits, said Clark Kendall, board-certified financial planner and president of Kendall Capital Management. For example, if you go from a 7% rate to a 5% rate, you can save that 2% or increase your 401(k) contribution.

See also: They had forgiven $10,000 in student loan debt. Should you pay off your credit card bill — or profit from the declining stock market?

Dunn cautions borrowers to also 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 smaller payment doesn’t outweigh the overall benefit of federal protection.”

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Cecilia Clark writes for NerdWallet. Email: [email protected]

 

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10/15/22 1425ET

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