Last year, in an effort to help student loan borrowers through the financial crisis that COVID-19 brought upon us, the Federal Government suspended payments and interest accrual on most Federal student loans. At first, this administrative forbearance was slated to last until October of 2021. Since then, the student loan pause has been extended twice, but we have been promised that this is the last time. Federal student loans will go back into repayment as of January 31, 2022.
Many of us were hoping for some kind of student loan forgiveness to follow this pause, but it does not look like we will see this kind of broad based student loan forgiveness in the near future. It’s true that the Biden administration has made some positive changes, one of which was cancelling student loan debt for more than 300,000 borrowers who qualify for student loan forgiveness through Total and Permanent Disability discharge. Another important change was removing tax liability for federal student loan debt that has been forgiven (at least until 2025). Before, for instance, if a borrower had $10,000 in student loans forgiven, they would have a tax bill of approximately $2,000. For the time being, borrowers receiving forgiveness have a reprieve from this tax hit.
The rest of us, however, shouldn’t hold our breath for our student loans to disappear. (Although that doesn’t mean you can’t make your voice heard and work towards better policies in the future.)
If you are like many borrowers (this Financial Trainer included!), you received an email in the last couple of weeks from the US Department of Education reminding you that the pause will be over soon and that you need to prepare to resume student loan payments after January 31. Also if you are like any borrowers we know (this Financial Trainer included!), the email signaled an end to the good days of dedicating those funds to other goals and needs.
The FinGym team and our clients made some great moves with that extra money. Many of us were throwing that money into a high yield savings account so we could make a few extra bucks before paying off a lump sum when the loans finally come due. Others reallocated those funds towards higher interest debt to save money on interest in the long run. Some saved the amount of their loans to build up funds for a downpayment on a home. Still others invested those funds so they could build up their retirement savings while they had some extra flexibility in their budgets. Regardless of the strategy employed, the student loan pause gave millions of borrowers much needed breathing room to pursue other financial goals and it made a huge difference in their financial journeys.
After seeing how life changing this pause has been for our clients, we are sorry to see it end, but for now, that’s what we have to work with. What we can do is be as prepared as possible for this change and make sure we are set up to make the reinstatement of payments as painless as possible.
Here’s how you can prepare now for starting to repay your student loans in February:
Contact your student loan servicer and update your info.
A lot of things have changed over the course of the pandemic so far. Many of us have moved, some of us have taken different jobs, and some are still coping with unemployment. You’ll need to contact your student loan servicer to be sure that your information is up to date. This can prevent you from accidentally missing payments if your bill is sent to an old address or paying too much for an IDR plan if your income has decreased. You should also check to see if auto payments are turned on so you aren’t surprised to see that money deducted from your checking account.
Use a student loan payment simulator to estimate your future payments.
With so many changes in jobs and other circumstances, it is important to make sure that you are enrolled in the payment plan that works best for you.
You can use a student loan simulator like this one to see what your monthly payments will be under different repayment plans, particularly if your income has changed drastically. You can experiment with what a standard repayment plan looks like and compare that to an income driven plan, and look at that in relation to your current income and expenses and decide what is right for you.
If this causes you stress or you have a hard time navigating the system, talk to your trainer or consider using a service like Savi to help you figure out which payment plan makes the most sense for you and whether you may be able to qualify for various types of forgiveness.
Practice making your student loan payments again.
If you work with a Trainer at the Gym, surely they advocated keeping your payment in your budget, even if you were reallocating those funds for something else. The main goal was to be intentional with these funds and not just let the “extra” money lead to lifestyle inflation you’d have to cope with once loans came due again.
If you have been doing this, great! You can just stay the course and switch up the recipient of that money when the time comes. If you haven’t, now is the time. Once you have estimated what your student loan payments will be, adjust your budget to make room for that payment. The best way to do this is to automate what happens to those funds. For instance, if you are going to practice paying your student loans, but you actually want that money to go to your credit card bill, automate credit card payment in the amount of your projected student loan payment each month. If your plan is to save or invest those funds while you still can, automate your contribution to your savings account or brokerage.
Consider refinancing your loans.
Federal student loans have a lot of protections that can make them worth their (sometimes) higher interest rates. For instance, you have access to hardship forbearance, cancer forbearance, and as mentioned above, discharge in the case of Total and Permanent Disability. Because of this, a slightly higher interest rate might be the price you pay for an insurance policy against financial and/or health related setbacks.
However, there are some instances in which refinancing could make sense for you. If you want to check out what your rates and payments would look like if you refinanced your Federal student loans, you can get a quote from a private student loan lender. I always suggest doing your math, talking to your trainer, or contacting a service like Savi before making this choice, though, because you can’t undo it.
Be sure that any extra payments you are making on your loans go to principle.
Listen carefully, because this one is extremely important: If you plan on making any extra payments on your student loans when the pause is over, you must submit a special request to your servicer if you want those payments to go to your principal. If you don’t do this, your bill will be “paid ahead” insead.
What’s the difference, you ask? It’s huge. If you just submit a payment in excess of what is owed on your student loans, chances are that your servicer will designate it to future payments. On the one hand, that means that if there is ever a time when you cannot make your student loan payment, you could be covered for that payment period. That sounds good until you look a little deeper: being “paid ahead” does not decrease your overall principal on your loan, so payments earmarked this way do not decrease the balance on your student loans and therefore do not help you save money on interest. It is just a regular old payment, left in the lurch waiting to be activated for a future monthly bill.
On the contrary, if you make an extra payment and apply it to the principal of your loan, it decreases the overall total that you have to pay, and therefore decreases the total amount that you are paying interest on. This is why people usually make extra payments on debt: because it saves you money over time. This is not what automatically happens when you make extra payments on Federal student loans though.
Let’s provide a little illustration of what this means. Say you have $10,000 of student loan debt remaining that you’ve been working your ass off to knock out as soon as possible. If you make a $1,000 extra payment on your loan, even if your minimum payment is $100, you will still be paying interest on the $10,000 because you have not made a payment on the principle. You have just paid ahead. However, if you designate that payment towards principal, then in the future you are only paying interest on $9,000.
That makes a huge difference.
Some of us, like myself, made this mistake and learned the hard way. But that doesn’t mean you have to. Instead, contact your student loan servicer and make sure that your extra payments will be applied to the principal. It may shock you to find out, in the year 2021, that this often must be done in writing. (And an added note, that letter often has to be sent to an address other than the one you’d use if you were mailing a payment by check.)
This blog post is helpful for understanding not only the importance of this issue but also how to solve it. In it you will find a template for stating your request in writing with steps to fool proof the process so you don’t find yourself having done all the right things and still getting the wrong result.
So there we have it.
Most of us are not thrilled to have this expense burst back into our budgets, but in the near term it is a reality we have to face. By taking these steps to soften the blow, you can readapt to your loan payments and reintegrate them into your financial plan.
5 Things to do Before the Student Loan Payment Pause is Over is written by Terri Bennett, A Certified Financial Trainer for financialgym.com