As you well know by now, the United States Supreme Court recently struck down the Biden-Harris one-time student loan debt relief program under which federal student loan borrowers were potentially eligible to receive up to $10,000 of student loan forgiveness ($20,000 if they had received a Pell Grant during college). Student loan borrowers, who have had required payments paused since March 2020, must resume making payments in October.
Seems simple enough, right? Not so fast. A few key points:
Make sure you know where to find your student loan.
Yes, you read that right. This may seem like an obvious piece of advice, but student loans change servicers from time to time, and many did so during the pandemic payment pause. Log into your student loan website(s) now so that you have plenty of time to get any access issues sorted out before it becomes urgent. If you are unsure which entity is servicing your student loan(s), click here for information on how to figure that out today.
Interest accrual resumes in September.
While payments are not required until October, interest accrual—which has been at 0% during the payment pause—resumes on September 1. If you have $30,000 in student loans that will carry a 6% interest rate once interest resumes, your loan balance will accrue $4.93 in interest per day beginning on September 1. To minimize the interest accrual, pay as much as you can by August 31 rather than waiting until the first payment is due in October.
Many student loan borrowers have been allocating the amounts they would have been paying on their student loans to high-yield savings accounts during the pause. The end of August is the time to use that money, including the accumulated interest, to chip away at your student loan balance before the interest meter starts running again. I suggest that you schedule your payment online for about a week before the end of August so you have time to resolve any processing issues that may arise and avoid any unnecessary interest accumulation.
Update your repayment schedule.
Once you have determined where to access your student loans, and scheduled any payments to take place before interest accrual resumes, take some time to weigh your options regarding repayment. You can select from either traditional or income-driven types of plans.
Traditional
Standard (fixed repayment schedule over a set number of years)
Graduated repayment (fixed payments that gradually increase periodically)
Extended repayment (like a standard plan, but over a longer period of time)
Income-driven
Pay-as-you-earn (required payments set at 10% of “discretionary income,” which is recalculated annually)—remaining balance forgiven after 20 years (25 years if any loans were for graduate school)
Income-based repayment—remaining balance forgiven after 20 or 25 years of payments
Income-contingent repayment—remaining balance forgiven after 25 years of payments
The Department of Education has a loan simulator you can use to weigh your options. You can also contact your loan servicer for assistance.
Be sure to review all the options, as many of them have been updated within the last year and are more flexible than they were previously. For example, the income-driven options now have a higher threshold for “discretionary income,” and your payment could be as low as $0 under the newer guidelines. (If your payment is $0 due to your income, that time still counts as “on-time” payments for the purpose of loan forgiveness.)
Most folks will pay more over time under the income-driven plans versus the standard plan. However, they are good options for those pursuing Public Service Loan Forgiveness.
Update your banking information.
Make sure your banking information is current with your student loan servicer. Additionally, if you were signed up for automatic payments before the pause—a great way to obtain a discounted interest rate—you will need to renew your automatic payments for them to take effect in October!
If you had not signed up for automatic payments previously, sign up now to lower your interest rate. As with any debt repayment strategy, be sure that any amounts paid beyond the minimum due are applied directly towards the principal balance. (You can make additional payments on a regular or ad-hoc basis.)
We recommend the “debt avalanche” method. After paying the minimum due on all your loans, any additional amounts should go towards the loan with the highest interest rate first (which may not be the loan with the highest balance). When that one is paid off, move down the line to the loan with the next-highest interest rate, and continue moving down the line as you pay off each loan.
Ask for forbearance or deferment if necessary.
If you are experiencing a short-term financial hardship, you can also ask your loan servicer about forbearance or deferment, which temporarily pause your loan repayment.
Interest still accrues during any forbearance or deferment. Additionally, because forbearance and deferment generally do not count towards timely repayments for forgiveness purposes, an income-driven repayment schedule may be a better option.
Explore the forgiveness options that are available.
While the broad-based forgiveness option advanced by the Biden-Harris administration is no longer available due to the recent Supreme Court decision, there are several existing student loan forgiveness programs that are still available. And like the repayment plan options, many of these programs have been updated while student loan repayments were on pause, so it is worth taking another look to see if you now qualify.
The two most common are public service loan forgiveness and teacher loan forgiveness:
Under the Public Service Loan Forgiveness program, borrowers can obtain forgiveness after making payments for ten years while working for a government or nonprofit organization. (The pandemic payment pause counts towards “on-time payments” for this purpose!)
Under the teacher loan forgiveness program, borrowers can obtain forgiveness after teaching full-time for five consecutive years in a low-income school.
There are other options available as well, such as borrower defense to repayment (based on misleading information or other school misconduct) or even bankruptcy (if you can demonstrate “undue hardship”).
Finally, many employers offer student loan assistance programs. Check with your employer today to see if they offer assistance and if you qualify. Many of these programs still exist but have been seldom utilized over the past few years. Additionally, consider this benefit if you plan to apply to a job in the near future as it may impact what specific position you choose to consider. For example, Xa’s employer offers student loan forgiveness for the three most junior levels of employees, but Xa does not qualify as a Senior Consultant.
Pay attention.
The Biden-Harris administration is exploring other options for student loan relief. In the meantime, though, continue making payments. There is no way to predict what may eventually be available, if any at all, and efforts will be made to not “penalize” borrowers who make payments in the interim.
Beware of scams.
Make sure that you are dealing with your student loan servicer, and nobody else. You do not need to pay any fees to research, apply for, or participate in any of these programs. When in doubt, start with the official Federal Student Aid website and go from there!
As with other types of scams, if you receive an unexpected phone call asking to talk about your student loans, hang up! Then use the phone number on your servicer’s website to contact them yourself.
Get ready for repayment.
Figure out where you stand regarding your student loans, and make a plan for paying them off as part of your overall debt reduction strategy. The sooner you start down that path, the sooner you will be free of student loan debt!
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