Talks about canceling student loans have borrowers eagerly awaiting 2021. But many have already benefited from unprecedented events in 2020:
– An administrative forbearance has suspended most interest-free federal loan payments since March.
– Forbearance also halted collections on overdue loans.
– Interest rates have fallen to historic lows.
It is not known how long these breaks will last. If you’re financially healthy, here’s how to enjoy it while you can.
MAKE A LUMP-SUM PAYMENT
The current forbearance on student loans is expected to end on January 31. All borrowers should have a repayment plan by then.
If you are able to pay your pre-pandemic payment amount, consider putting more money into your loans now.
Student loan payments must first cover the unpaid interest. But with those fees suspended since March, a lump sum payment would put a direct dent in what you owe.
“Overall, the majority of students will not have any sort of accrued interest,” says Stacey MacPhetres, senior director of education funding at Bright Horizons, which provides workplace employee services including educational advice.
An exception could be recent university graduates whose loans have not yet been repaid. These could have several years of accrued interest.
For example, suppose you took out $ 5,500 in unsubsidized loans at 4% interest in the first year. Four years later, these loans might have accrued nearly $ 900 in interest to add to your principal balance at the end of your grace period. Paying off that interest before that date will prevent future interest from growing on a larger balance and pay less overall.
MacPhetres says the “fervor” around forgiveness has made some borrowers balk at additional payments. But there is no guarantee that the debt will be canceled.
“Unless something happens, you will be expected to resume the repayment,” she says.
If your payments will be too expensive, contact your maintenance agent for options such as income based reimbursement.
EXIT THE FAULT
Failure to pay federal student loans has consequences such as wage garnishment and the loss of tax refunds and Social Security payments. These actions are also expected to resume in February.
To avoid collection activity, deal with delinquent loans as soon as possible. To do this, you have two main options: consolidation and rehabilitation.
Federal student loan consolidation can pay off your delinquent loan and replace it with a new one. This can quickly correct a default if you choose an income-driven plan for your new loan.
“If the borrower thinks he might be subject to Social Security compensation or tax compensation, speed may matter,” says Persis Yu, director of the National Consumer Law Student Loan Borrower Assistance Project. Non-profit center.
Rehabilitation takes at least nine months of on-time payments and puts your delinquent loan back into good standing. This removes the default from your credit report, but not the late payments that led to it.
The months spent in the current administrative abstention count towards rehabilitation. If that hiatus is extended until September, as some lawmakers have proposed, it could cover the entire rehabilitation process if you sign up by the end of 2020.
With the two options, Yu says to ask himself, “Is the time to take this step?” “
It won’t if you can’t afford to pay and you default again. An income-driven plan might help, but Yu says these payments aren’t always affordable. A tool like the Department of Education’s Loan Calculator can help you estimate potential costs.
PRIVATE REFINANCING LOANS
Refinancing replaces your student loans with a new loan from a private lender. Do not refinance federal loans until it is clear whether the administrative forbearance will be extended.
But private student loans do not qualify for this benefit, and refinancing them could save you money.
“With interest rates so low, most private student loan borrowers are able to reduce this interest rate quite significantly,” says Jared Andreoli, chartered financial planner and president of Simplicity Financial in Milwaukee.
For example, refinancing a $ 10,000 private loan from 10% to 5% interest would reduce your monthly payment by $ 26 and save you $ 3,130 in total, assuming a 10-year repayment plan.
You will need a FICO credit score of at least 600 and a stable income to be eligible for refinancing. Refinance private loans as soon as you, or a co-signer, meets these conditions.
While the Federal Reserve has indicated that interest rates will stay low, Andreoli says that doesn’t mean refinancing rates will continue to fall.
“If people expect a lower rate,” he says, “now is the time to act. “