Most people know that payments have been paused on the majority of federal student loans since March of 2020. Interest rates on eligible loans have also been fixed at 0% the entire time, which has meant that people who can’t or don’t want to make payments on their loans haven’t been penalized so far.
This emergency deferment period was put in place as the result of Covid-19, and it has been extended multiple times, most recently through August 31, 2022. Yet, the current pause on payments and 0% interest period has just been extended by the Biden administration again, this time through December 31, 2022.
Of course, you have probably read that borrowers with incomes below $125,000 (or $250,000 for couples) are also getting $10,000 to $20,000 in federal student loan debt forgiven per borrower, with the higher amount going to those who went to college using Pell Grants.
Other benefits are in the works as well, including a new income-driven repayment plan that requires borrowers to pay 5% of their discretionary income in payments each month (instead of 10%) and updates to Public Service Loan Forgiveness (PSLF) that are meant to help more people qualify.
This is good news for borrowers who have a low amount of debt that could be wiped away completely by Biden’s loan forgiveness plan. However, everyone else will need to plan on making payments on their loans again come January 2023.
Fortunately, there are several steps borrowers can take to make the most of this extended deferment period through the remainder of the year. If you are wondering what moves you can make to improve your financial prospects until payments resume, consider these tips.
Pay Down High Interest Debt
While interest rates on federal student loans are definitely on the rise for students who borrow during the 2022-23 academic year, individuals who already have federal student loans will pay the same rate they were paying before March of 2022 once federal student loan payments resume.
Regardless, it almost always makes sense to pay down high interest debt over federal student loans, which come with low fixed interest rates that never change. After all, the average interest rate on credit cards is currently nearing 18%, and many credit cards have significantly higher rates than that.
By spending this extended deferment period paying down high interest debt, you have the potential to save a boatload on interest and reduce the amount of revolving debt you have in one fell swoop. Also remember that you can use several tools to consolidate and pay down high interest debt faster, including balance transfer cards or debt consolidation with a personal loan.
Focus On Paying Off Private Student Loans
Maybe you don’t have credit card debt but you do have private student loans. In that case, you have been making payments all along since March of 2020 since these loans do not qualify for federal protections like deferment or forbearance.
With federal student loan payments still paused through December 31, 2022, now is the perfect time to double down on your repayment efforts on private student loans. Consider making double payment on your loans if you can, or do as much as you can in terms of making more than the minimum payment each month.
You’ll have to pay these off eventually anyway, especially since private loans won’t qualify for any of the student loan forgiveness plans being considered by the Biden administration at the moment.
Get Your Finances Organized
Whether you have high interest debt to pay off or some private student loans to deal with, this deferment period is also the perfect time to get your financial ducks in a row. This means taking stock of where you are at right now, including an honest account of how much debt you have as well as how much you have saved for retirement and other goals.
If you are spending more than you wish you were each month, you can also try using a monthly budget or spending plan to see if it helps you get on track. This process starts with tracking your spending to see where your income has actually gone the last few months, and it ends with having a plan in place that accounts for regular bills and expenses while setting caps on discretionary spending.
There are several budgeting methods to consider, including zero-sum budgeting and the 50/30/20 budgeting method. You can also use a free budgeting app to help you keep track of how much you’re spending in all major categories, as well as your progress towards various savings goals.
Plan Your Repayment When Student Loans Resume
Finally, it won’t hurt to spend this time figuring out if you’re on the best student loan repayment plan for your needs. This is especially true if your income has gone way up or way down since March of 2020 when payments were initially paused, or if you want to slow down or speed up your repayment plans to reach any number of goals.
For starters, it’s worth noting that there are several repayment options for federal student loans beyond standard, 10-year repayment. For example, extended repayment plans for federal loans let you stretch out monthly payments over up to 25 years. You can also choose among income-driven repayment plans that let you pay a percentage of your discretionary income for 20 to 25 years before forgiving your remaining loan balances.
Examples of income-driven repayment plans include Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), Income Based Repayment (IBR), and Income Contingent Repayment (ICR). Your monthly payment could even be as low as $0 on an income-driven repayment plan if your income is low enough.
Also note that some student loan forgiveness plans may be easier to qualify for now, including Public Service Loan Forgiveness (PSLF). In fact, the US Department of Education (ED) announced a temporary PSL PSL F waiver program on October 6, 2021 that would help borrowers receive credit for payments that did not previously qualify for PSLF or TEPSLF. But remember, you need to consolidate by October 31, 2022 to take advantage!
Generally speaking, PSLF lets borrowers who agree to work in eligible public service positions pay off their loans on an income-driven repayment plan for 10 years (120 months) before having their remaining loan balances forgiven.
If you have been wondering whether you could become eligible for PSLF due to this temporary waiver, this page on the US Department of Education (ED) website can help.