As Student Loan Forgiveness Comes to an End, Here's 4 Ways to Prepare Yourself

By Chika

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Last Updated: November 9, 2022

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Interest rates on student loans will resume after Dec. 31 2022.

Though there is a possibility that the deferment period will be extended, the point remains that a day of reckoning is coming. At some point, the government will have to reactivate payments on student loans. 

For many federal student loan borrowers, planning for repayment is critical on whether the deferment will be extended or not. Sitting around to see if the government will cancel your debt is not a strategy.

Rather, you should anticipate non-forgiveness, and make adequate plans to absorb the extra financial commitments in a way that would not derail your overall financial plans.

In this article, we take a look at steps you can take to prepare yourself as the deferment period begins to wind down. 

 

 

4 Ways to Prepare Yourself to Repay Outstanding Loan Balances

1. Get on top of your student loan balance.

Federal Student Aid states that any outstanding loan balances will be re-amortized after relief has been applied.

When the payment pause lifts, outstanding interest will be capitalized and tacked on to their existing balance. This implies that the monthly payments for borrowers will depend on their new debt.

It's a wise move to eliminate the remaining balance before the restart. This allows you to take advantage of the 0% interest rate, lowering the amount of interest that will eventually be paid on the debt.

Before making a voluntary payment, you should ask your servicer how much outstanding interest you owe before they can start to pay off the principal. 

 

2. Consider other student loan forgiveness options.

Borrowers should investigate whether they may qualify for additional forgiveness like the Teacher Loan Forgiveness or Income-Driven Repayment (IDR) Plans. 

Under the Teacher Loan Forgiveness Scheme, eligible federal student loans up to a combined total of $17,500 may be forgiven if you teach full-time for five consecutive academic years in specific elementary or secondary schools or educational service organizations that serve low-income families and satisfy other requirements.

Additionally, a new income-driven repayment plan put out by President Biden may be advantageous to borrowers.

Borrowers will be required to pay no more than 5% of their discretionary income each month toward undergraduate loans, among other requirements. The proposal still needs to go through formal processes. Some experts don't anticipate the new strategy to be released until at least the summer.

Alternatively, you can refinance at a lower rate with a private lender. When you refinance, you can often lower the amount of interest you owe every month, helping you save more on your monthly payments over time.

Refinancing also allows you to choose a more ideal payment plan, with the option to pay off the loan over many years or to pay it off more aggressively over a shorter amount of time.

 

3. The tax factor.

Federal taxes won't be payable on student loans forgiven under the Biden plan.

However, many might be liable for state taxes. Indiana recently declared, for instance, that forgiveness will result in state income taxes, and some debtors might also owe county levies. State-level taxation may be feasible in Arkansas, California, Minnesota, and Wisconsin.

Mississippi and North Carolina have also made statements of a similar nature.

When deciding how to repay a loan, borrowers who live in states where taxes will or are expected to be levied should make sure they have money set aside to satisfy this responsibility.

 

4. Consider future financial goals.

When making decisions about student loan repayment, borrowers should be sure to keep their overall financial situation in mind.

Depending on their student loan interest rate and financial situation, you may discover that saving for retirement or a home is more advantageous.

Setting aside even tiny sums when you're young can help you accumulate sizable savings by the time you retire because of the power of compounding.

Although managing student debt might be challenging, it is worthwhile to invest in your future.

You can successfully manage loan repayment while saving for other financial goals. The key here is meeting up with your minimum payments. You can also take advantage of the deferment period to reduce the principal on your student loan. 

 

What interest rate can I expect to pay on my loans when the interest waiver ends?

When payments resume, you’ll have the same interest rate you paid prior to the forbearance period. The waiver temporarily set interest rates at 0%. But once it expires, you’re back to paying the interest rate you previously paid.

Fixed interest rates are common for government loans. Since fixed rates were implemented in the 2006–2007 academic year, loans from decades before may have had a variable rate.

For the 2020–2021 academic year, interest rates for undergraduate students, graduate students, and PLUS loan borrowers all reached record lows of 2.75%, 4.30%, and 5.30%, respectively.

But from July 1, 2021, interest rates on student loans will be higher: 3.73% for undergraduate students, 5.28% for graduate students, and 6.28% for PLUS loan borrowers.

 

Revaluate your spending habits.

Your buying patterns have likely shifted a little since the pandemic.

Consider your student loan payments now to see what that means for you. Think about your budget and determine how making new payments will affect your monthly spending.

You can start making adjustments now. That way, when the deferment period is over, you won't have any challenges adjusting to the extra obligation of paying your student loan. 

 

Key Takeaway on Student Loan Forgiveness Winding Down

The December deadline is just weeks away, but not everyone will feel the impact of this move equally.

Those who are adequately prepared will be able to waltz through the repayment period. You can take a few steps to prepare and get ahead of any potential confusion and avoid payment mishaps. 

  • taking advantage of the 0% repayment period
  • seeking other alternatives other than Biden's forgiveness program
  • investing in your future
  • reevaluating your spending habits

These are some of the things you can do to prepare yourself as the deferment period winds down. 

You can check here if you want to find out other ways to take advantage of the student loan pause.

Photo by Buro Millennial

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