Your federal student debt repayments are resuming: Don't get surprised, prepare now
- Student debt repayments are set to resume on Jan. 1 for millions of Americans.
- Now is the time to prepare to have to start paying again.
- Making payments before the pause ends and refinancing are among the options to consider.
Tens of millions of Americans will have to start resuming federal student debt payments in January, but are they ready?
President Joe Biden said last week those earning less than $125,000 (or $250,000 for families) annually will be eligible for $10,000 in federal student loan forgiveness. Pell Grant recipients will be eligible for a $20,000 cancellation.
Everyone else or those who will still have student loan balances after cancellation have repayments paused until Dec. 31 (including this pause to yearend, repayments will have been suspended seven times since March 2020).
By the time payments resume on Jan. 1, it will have been nearly three years since borrowers were last required to make a payment.
Those consumers already face rising interest rates and nearly 40-year high inflation that’s short-changed their wallets.
"We can’t lose sight of the fact that there will still be significant amounts of outstanding student loan debt across the country,” said Kristen Carlisle, general manager of Betterment at Work, a money manager and online financial advising firm.
Besides, Biden’s forgiveness plan is still just a proposal that will be open to comment for 30 days once it hits the Federal Register. Others have said the president doesn’t have the authority to cancel the debt, suggesting legal challenges ahead, some analysts note.
How many people will have to start repaying?
More than 45 million Americans have federal student loans totaling about $1.6 trillion, according to the White House. Its cancellation plan would provide relief for up to 43 million borrowers, including canceling the full remaining balance for roughly 20 million borrowers, the White House said.
What are the challenges?
For the most part, people’s finances improved during the past couple of years with help from government money. Millions of Americans initially built-up savings with three rounds of government stimulus checks, enhanced unemployment benefits, and advanced child tax credits and had few places to spend their money.
However, that quickly changed this year. With consumer inflation surging to the highest level in about 40 years and the Federal Reserve on an aggressive interest-rate hiking cycle to try to contain it, people are increasingly dipping into those savings to afford everyday expenses and worrying about their finances holding up if the economy slips into recession.
In July, the personal savings rate fell to 5%, the lowest level since August 2009 and down from the record high of 33.8% in April 2020.
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How should people prepare?
First, find out from your loan servicer how much you owe since it could’ve been a while since you made a payment. Most likely, your payment amount will remain the same if you have a fixed rate.
“It’s important to understand how much you’ll owe each month,” said Daniel Milan of Cornerstone Financial Services in Southfield, Michigan. “Fit it into your monthly budget so it’s not a surprise when payments resume.”
Equally important, review interest rates on your loans. “If you have multiple loans with different interest rates, then you should tackle the loan with the highest interest rate first,” Milan said. “Consider putting more toward the loan with the highest rate, while paying the minimum payment on lower rate loans.”
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Should I refinance?
If your rates are high, maybe.
Rates have risen by more than 2% so far this year but are still low, said Mark Hamrick, Bankrate senior economic analyst. Rates on federal loans, which comprise about 90% of student debt, are between 4.99% and 7.54%, and average private student loans are between 3.22% and 13.95% fixed and 1.29% to 12.99% variable, Bankrate.com says.
Federal loan rates apply to all borrowers, but private loans depend on various factors including credit score. And credit scores, especially for those in the lower ranges, have improved over the past couple of years with help from government money, said Ethan Dornhelm, vice president of FICO Scores and Predictive Analytics.
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Credit scoring giant FICO said this month the average U.S. FICO Score stood at a record high 716. A FICO Score is a three-digit number between 300 and 850, based on information in your credit reports. It helps lenders determine how much you can borrow and the term and interest rate on the loan.
So, people should check their FICO scores because they can probably secure a lower rate now.
Be careful though if you have federal loans. Refinancing into private loans means you’ll give up benefits such as flexible income-driven repayment plans, interest-free repayment pauses if you lose a job, and potential loan forgiveness.
What if my rate’s already low?
If after checking around, you decide the rate on your student debt is still better than what’s available now, consider paying your loan down before the pause lifts.
"It might make sense to keep your money in savings, earn some interest and then right before the pause ends, make a large payment to student loans,” said Eric Schuppenhauer, head of national banking and lending at Citizens Bank. Because the moratorium includes a 0% interest rate, 100% of payments made during the pause goes toward your principal.
If you trim your loan amount, you may be able to cut the length of the loan and save money in the long run.
RESUMING SOON:Along with forgiving student loan debt, Biden extends pause. When will payments start again?
WHY FORGIVENESS?:'Forgiving' student loans isn't motivated by kindness. It's all about cold, hard politics.
Are there other ways to get help paying off student loans?
Check with your employer. An Employee Benefit Research Institute survey released last October showed that 17% of employers currently offer student loan debt assistance and another 31% plan to do so.
For example, Aetna matches employees’ U.S.-based student loan payments up to $2,000 per year for a lifetime maximum of up to $10,000 for qualifying loans, PwC offers associates and senior associates up to $1,200 a year toward student debt, and Google matches up to $2,500 per year.
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What if this is still all too confusing?
Contact your loan servicer or a nonprofit – such as The Institute of Student Loan Advisors, American Consumer Credit Counseling, or National Foundation for Credit Counseling – specializing in helping with student loans.
You can also use online tools to calculate repayment amounts, terms and financing options.
Online platforms like Summer, Savi, or Candidly can save people a lot of time. They help find users appropriate money-saving programs and can enroll them all in one place.
“Our average user saves $326 per month, which we can help them find in six minutes,” said Laurel Taylor, Candidly founder and chief executive. Once users find those savings, Candidly tries to take users a step further, asking them to commit a percentage of that for emergency or retirement funds.
“Behavior economics shows people are more likely to take that next step” immediately, she said.
Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at firstname.lastname@example.org and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.