The Department of Education announced in early August the final extension of the student loan payment pause until January 31, 2022. With this comes relief measures for eligible loans including:

  • Suspension of loan payments
  • 0% interest rate
  • Stopped collections on defaulted loans

Even with the extension, this highlights the need to plan for the resumption of loan payments for student loan borrowers in February 2022. Here are a few important questions every borrower should ask themselves soon to be ready to tackle their student loan payments when they start up again.

1. Has my financial situation changed? Should I consider an Income Driven Repayment plan, or a Public Service Loan Forgiveness program if that has become available to me?

Many individuals have had changes to their finances since the beginning of the pandemic. A job change, income level change, or change in family structure can all be good reasons to readdress your student loan payment options. If you change jobs, do you now qualify for a Public Service Forgiveness Program or have you lost that status?  You might be eligible if you work for a qualifying agency:

  • Government organizations at any level (U.S. federal, state, local, or tribal) – this includes the U.S. military
  • Not-for-profit organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code
  • AmeriCorps or Peace Corp

The change in income could mean being eligible for one of the four income-driven repayment plan options:

  • Revised Pay As You Earn Repayment Plan (REPAYE Plan)
  • Pay As You Earn Repayment Plan (PAYE Plan)
  • Income-Based Repayment Plan (IBR Plan)
  • Income-Contingent Repayment Plan (ICR Plan)

These then could give you the breathing room to still make payments but improve cash flow in the short term.

2. I haven’t done anything to prepare for the payments restarting on my student loans. What can I do if I haven’t set aside any funds? Should I be planning for the possibility of student debt forgiveness?

What once seemed like an extremely unlikely scenario even a year ago, student debt forgiveness, is now being considered by the Biden Administration for a range of $10,000 to $50,000. The Administration has recently cancelled debts for individuals with Total and Permanent Disabilities, which impacted hundreds of thousands of borrowers. While this isn’t applicable to everyone, it certainly gives fuel to the argument that perhaps this will lead to a broader debt forgiveness package in the future. With this uncertainty, holding off on making any changes to loans such as paying a lump sum to lower the balance or refinancing to a private loan to get a better interest rate might be a smart choice.

Regardless of what may happen, if you haven’t been able to save anything for your upcoming student loan payments, a wise strategy would be to first assess if your payments could change based on your forgiveness or income-based repayment plan eligibility, and then start working to set aside some funds to cover a few months of payments. The important part is to get an accurate estimate of the future payment, so you aren’t surprised when the bill comes due.

3. I have set aside several months’ worth of student loan payments, what are some options for me to consider doing with that lump sum of cash?

The first, and most obvious option, would be to apply those saved up “payments” to the balance of the highest interest loan, if applicable. This would help lower the principal, shorten the length of the loan, and save some money on interest. However, given the possibility of loan forgiveness, borrowers might opt to pay the minimum payments until forgiveness has been confirmed or rejected. If the window for forgiveness closes and we no longer see a way for that to happen in the short term, it may make sense to refinance a federal student loan to a lower interest private student loan. This would lower the monthly payment and free up cash flow for the borrower to focus on other financial matters.

A few options to consider using your lump sum payment on while waiting for more news on debt forgiveness over the next 12 – 24 months are:

  • One path could be to use the lump sum to pay down other higher interest debts, such as credit card balances, auto loans, or unsecured personal loans. Paying down the higher interest debts will save you money in the long run by lowering the amount of interest you are paying.
  • Start saving for other long-term goals you might have. This would include building up a down payment for a house or starting an IRA to get funds growing for retirement.

Whatever your situation or how things have changed, doing a little bit of planning now could put you in better financial condition in the future.