The pandemic-era student loan pause is now coming to an end, and those with student loan bills will be expected to start repaying as early as October after being placed on hold for more than three years.
In total, around 44 million American adults currently owe more than $1.6 trillion in federal student loans. Since March 2020, under the Trump Administration, borrowers were provided student loan relief after having their accounts frozen. At the time, many thought this would only last a couple of months, or until the pandemic waned.
However, since then, the White House has received a new leader, and after multiple attempts, and a few victories which already witnessed millions of borrowers having their student loans discharged by the U.S. Department of Education, those with outstanding balances will be expected to start repaying by early fall.
The Good and the Ugly
With millions of borrowers being weighed down by the burden of student loans, the Biden-Harris Administration approved $116.6 billion in student loan forgiveness, clearing the accounts of more than 3.4 million borrowers.
Just over two months ago, the U.S. Department of Education announced that they would automatically discharge the accounts of more than 804,000 borrowers, with student loans that have been outstanding for more than 20 years, wiping out around $39 billion in student loan debt.
This is however part of President Biden’s bigger plan to provide more than $400 billion in student loan relief, however, there have been some obstacles throughout the way.
For one, the Supreme Court of the United States recently threw a wrench in the President’s plans to wipe off more than $400 billion in student loans. While the plan would benefit the majority of borrowers who are burdened with high-interest student loans, opposition leaders on both sides of the aisle have not been pleased with Biden’s long-term initiatives.
The other bad news is that those borrowers who took out student loans with variable interest rates will be expected to pay a lot more once repayments commence. During the last 18 months, the Federal Reserve Bank has initiated an aggressive monetary tightening policy in an attempt to drive down sticky inflation.
While their inflation-busting attempts have helped to bring down inflation, interest rates are currently at their highest in more than two decades, with the central bank’s interest target rate now standing at 5.25% - 5.50%. To put it in perspective, the last time interest rates were this high, President George Bush was still in office.
Those that have fixed-interest rate loans will be pleased to know that their interest rates would have remained the same, despite soaring interest rates experienced over the last year.
Building a student loan repayment strategy
With millions of borrowers expected to start paying their student loan bills, you potentially being one of them, it’s time to start thinking of a strategy that can help you minimize the debt burden, and budget more efficiently.
While many of those borrowers, who are presumably only now starting their professional careers, are among the majority that are expected to pay their student loan bills, the following tips will help you create a foolproof strategy, without completely breaking the bank.
Apply to a student loan forgiveness programs
Navigating the complex process of paying off debt isn’t always easy. However, there are several student loan forgiveness programs available to borrowers. Applying to one of these programs is one of the first places you should start, especially if you still have a lot of student loans outstanding, or haven’t made any payments in the last couple of years.
Income-driven repayment forgiveness
The first, and perhaps most well-known program is the income-driven repayment (IDR) forgiveness program, which comprises four main plans. Keeping it simple, this program allows you to minimize your loan repayments at a percentage, based on your monthly income.
Borrowers typically receive loan forgiveness after making 240 or 300 monthly payments, which is the equivalent of 20 to 23 years. Each plan is different but is considered more beneficial to borrowers who still have large amounts outstanding based on their income.
Public Service Loan Forgiveness
Another program is PSLF or Public Service Loan Forgiveness, which extends to government and qualifying nonprofit employees who have federal student loans outstanding. Borrowers who apply for this program are eligible to have their outstanding loan balances forgiven after making 120 qualifying loan payments - the equivalent of 10 years.
State-sponsored repayment assistance
There may be some state-sponsored repayment programs available in your home state, which is open to licensed professionals. These programs can be different depending on which state you may be holding a professional license in and are typically based on your loan repayment schedule.
There may be other factors that further influence your eligibility, however, these programs should not be overlooked, especially for borrowers who have recently completed or are in the process of completing their undergraduate studies.
Other loan forgiveness programs can assist individuals working in education, healthcare, law, or qualifying military personnel. Be sure to research forgiveness programs that may be available in your state, and what the qualifying criteria for each may be.
Understand how student loans work
The next thing you need to do is begin to understand how student loans work, and how monthly payments are calculated. One thing to remember is that with any loan, whether it’s a federal student loan or a smaller personal finance loan, is that over time, interest will be charged on the money borrowed from you.
This is where most people tend to struggle, as interest is typically the most expensive part of the loan, and the majority of the time, you will be paying off mostly interest before you even begin repaying your principal loan amount. With federal student loans, the interest accrues daily, from the day the loan is discharged. In some cases, borrowers will have a subsidized loan, whereby another entity or the government pays the interest.
There may be instances where your owed amount may increase, even when you are making payments. This usually happens if the payments you make are not high enough to cover the interest, or when a loan is placed under deferment or forbearance. This process is known as negative amortization, and it’s critical to build a payment plan that covers the interest, to avoid having your borrowed amounts increased.
Consider repaying capitalized interest
As we’ve previously discussed, one of the main pain points that comes with taking out any loan is the burden of having to repay interest on top of the principal amount. In this case, where capitalized interest is considered, borrowers will often be required to pay any additional interest on a loan that has not yet been fully repaid.
In general, capital interest comes into effect when a student loan is still in deferment or forbearance. This would mean that if you are unable to pay back your loan, you might still receive additional interest on the principal or borrowed amount.
What’s more, there may be instances where a borrower may be required to pay capitalized interest if they recently changed from an income-driven repayment plan. Once you have determined whether or not your federal student loan carries any capitalized interest, it’s often advised to start repaying that interest sooner, to avoid any additional costs or payment fees.
Over the near term, capitalization of a loan might not seem like a big issue, it’s when you begin calculating the long-term cost, or lifetime cost capitalized interest may have on your principal loan.
Build a budget
This might seem like one of the main elements of building a repayment strategy, however, many borrowers often don’t consider the importance of building a budget around their loan repayments.
Lenders will often provide borrowers with an installment amount that they will need to pay each month. These amounts may vary, depending on the size of the loan, and the interest. Nonetheless, this amount should be included in your monthly expenses, and appropriate measures will need to be taken to ensure that payments are fulfilled each month.
The thing with building any budget is that it allows you to plan more accurately. Consider building your budget as a financial roadmap, helping you estimate how much money you will need each month to pay off any debt and other bills before you can use any leftover cash for other necessities.
Once you have a financial roadmap, you can plan better. You don’t want to find yourself where you have more months left at the end of your paycheck. A budget allows you to make smart and more logical financial decisions but also helps you to stay on track with your financial goals.
Create automated payments
Having automated payments each month will ensure that you don’t miss any important payments, or incur any late payment fees. Additionally, it’s good to know that signing up for automatic payments can reduce your interest rates by 0.25%. This is mostly applicable to borrowers who have federal student loans.
For borrowers that still have a lot of student loan debt outstanding, this might not sound like much, however, over time these small savings begin to add up, and can significantly help reduce the interest on your principal loan amount.
What’s more, having automated payments can help you become more financially stable, as this would indirectly force you to budget more efficiently, and plan for any potential emergencies. Missing any payments, for whatever reason this may be, could only further increase the interest on your loans, or cost you additional penalty fees with your lender.
Make additional payments
For those individuals that may be in the position to pay off larger parts of their student loans, faster, it’s advised to make additional payments where possible. While not everyone might have this opportunity, for the instances where you might have a little bit of extra cash left each month, or even a bit of savings that have piled up, it can be a smart decision to use this money to pay towards any outstanding debt.
Sure you might have a financial goal or long-term plan with your money, however, it’s always better to start paying off any debt you might carry, to avoid lengthy payment plans, or having to spend most of your time paying off interest.
Paying more than you need to will help shorten the time needed to repay the loan, but you will also reduce the financial burden of having to pay off any outstanding debt. These small efforts, whether it’s a few extra dollars each month, or every second month, will help you clear your student loan bills faster, and allow you to plan for the future.
Make use of possible tax deductions
Now that you may be earning an income, you will have to file for income tax each season, however, there may be instances where you can claim the interest of your student loan on your individual tax return.
There are however some conditions, and this may often vary depending on your personal income, and under which tax status you may be filing. Additionally, the amount you can claim will also vary, and you could be eligible to claim up to roughly $2,500 of the student loan interest paid within one calendar year.
Make sure to review your personal tax filings, and whether you are eligible to claim any interest payments. As previously mentioned, using these tactics can help you make additional payments towards your student loans, which in the long run can help you pay off any outstanding debt faster.
Final thoughts
Unfortunately, there is no easy way out of paying off student loans, while there have been several attempts to help rid borrowers of their federal student bills, making the necessary financial adjustments is perhaps the only long-term solution to ensure you clear yourself from any outstanding debt.
While there may be several strategies that can help you make the necessary payments towards your student loans, consider choosing a method that works best for you and your budget.
Keeping track of your student loans will help you plan more efficiently, and ensure that over time, you can reduce the debt burden that weighs on millions of other borrowers. If you require guidance, make sure to reach out to a professional, to help put you on the path toward a debt
