February 8, 2023

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What borrowers can do while student loan forgiveness is up in the air

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1. Make the most of extra cash

2. Consider making payments anyway

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If you have a healthy rainy day fund and no credit card debt, it may make sense to continue paying down your student loans even during the break, experts say.

There’s a big caveat here, however. If you’re enrolled in an income-driven repayment plan or pursuing public service loan forgiveness, you don’t want to continue paying your loans.

That’s because months during the government’s payment pause still count as qualifying payments for those programs, and since they both result in forgiveness after a certain amount of time, any cash you throw at your loans during this period just reduces the amount you’ll eventually get excused.

3. Review your options for when payments resume

President Biden: 22 million people have signed on for student debt relief

If you’re unemployed or dealing with another financial hardship, you might want to put in a request for an economic hardship or unemployment deferment. Those are the ideal ways to postpone your federal student loan payments, because interest doesn’t accrue.

If you don’t qualify for either, though, you can use a forbearance to continue suspending your bills. Just keep in mind that with forbearance, interest will rack up and your balance will be larger — possibly much larger — when you resume paying.

4. Check if refinancing makes sense now

Higher education expert Mark Kantrowitz had previously recommended that federal student loan borrowers refrain from refinancing their debt with a private lender while the Biden administration deliberated on how to move forward with forgiveness. Refinanced student loans wouldn’t qualify for the federal relief.

Now that borrowers know how much in loan cancellation is on the table — if the president’s policy survives the Supreme Court — borrowers may want to consider the option, Kantrowitz said. With the Federal Reserve expected to continue raising interest rates, he added, you’re more likely to pick up a lower rate with a lender today than down the road.

Still, Kantrowitz added, it’s probably a small pool of borrowers for whom refinancing is wise.

Your rate doesn’t matter if you lose your job, have sudden medical expenses, can’t afford your payments and find that defaulting is your only option.

Betsy Mayotte

president of The Institute of Student Loan Advisors

Those include borrowers who don’t qualify for the Biden administration’s forgiveness — the plan excludes anyone who earns more than $125,000 as an individual or $250,000 as a family — and those who owe more on their student loans than the administration plans to cancel, he said. The latter borrowers may want to look at refinancing the portion of their debt over the relief amounts, he added.

Still, borrowers should first understand the federal protections they’re giving up by refinancing, warns Betsy Mayotte, president of The Institute of Student Loan Advisors.

For example, the U.S. Department of Education allows you to postpone your bills without interest accruing if you can prove economic hardship. The government also offers loan forgiveness programs for teachers and public servants.

“Your rate doesn’t matter if you lose your job, have sudden medical expenses, can’t afford your payments and find that defaulting is your only option,” said Mayotte in a previous interview about refinancing.