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Make a Plan to Start Repaying Student Loans

Make a Plan to Start Repaying Student Loans
Written by Publishing Team

In an effort to provide economic relief during the pandemic, the federal government halted payments on federal student loans last year, with no interest accrued on loan balances. The moratorium has been extended several times, but now that the pandemic has subsided and the economy has recovered, the pause is set to expire on September 30. The loan service providers planned to start notifying borrowers in August of when their payments would resume.

Time to refinance? In addition to a notice from your loan service, you may receive postings or emails from private lenders offering to refinance your student loans at interest rates as low as 2.5%.

The best private loan deals are limited to borrowers with excellent credit or co-signers. But even if you qualify for refinancing at a lower rate, you may want to wait. If President Biden makes good on his pledge to forgive up to $10,000 in student loan debt, it will likely be limited to federal loans. Once you refinance into a private loan, you cannot refinance into a federal loan.

Another reason to wait: The hold on federal student loan payments may be extended. Education Minister Miguel Cardona said the Department of Education is considering extending the exemption, and the most likely scenario is that it will last until the end of 2021, says Mark Kantrowitz, a financial aid expert and author of How to request more financial aid for college. And even if the waiver is not extended, rates on private student loans are likely to remain low through the end of 2022, he says, meaning borrowers interested in refinancing have plenty of time to consider their options.

If you still think it is a good idea to refinance with a private loan, read the fine print of any offer you are considering. Some plans offer lower interest rates the first year and raise them later. But it is important that you do not refinance unless you are confident that you can afford the payments under the plan you are considering. Private loan options for borrowers who are unemployed or experiencing other economic hardship are generally not as flexible as federal loans.

However, if you already have private student loans, there is no reason not to consider refinancing a loan at a lower rate. Be sure to compare the monthly payment to the total cost when you’re considering consolidating or refinancing student loans, says Kantrowitz. Extending the repayment period will simply lower your monthly payments, but you can pay thousands of dollars in additional interest by the time you pay off the loan.

To avoid higher interest rates down the road, look for a lower fixed rate rather than a floating rate. And if you can afford it, you may also want to consider a shorter repayment period. Even though your monthly payments may go up, you’ll save interest and be out of debt sooner. Most lenders offer loan repayment terms of 10, 15 and 20 years.

Federal loan options. If your budget can’t handle your federal student loan payments, you may be eligible to reduce them by enrolling in an Income-Driven Repayment Plan (IDR). There are many IDR plans available through the Department of Education, but all of your monthly payments are based on your earnings. If you are already enrolled in an income-driven plan and your income has dropped significantly, you can also ask your loan server to reconfirm your income and recalculate the payment, which can be as low as $0. You can apply for an IDR plan at https://StudentAid.gov/app/ibrInstructions.action and select the plan for which you qualify and which will provide you with the lowest monthly payment. You may end up paying more interest in the long term because you are extending the repayment period, but after 20 years of repayment, you may qualify for the credit.

If you can’t make payments at all, you may qualify for deferment or patience. There are two types of postponement: economic hardship and unemployment postponement. You must be unemployed to qualify for unemployment deferral, but may qualify for economic hardship if you receive federal or state government assistance, are a Peace Corps volunteer, or work full-time but earn less than or equal to the federal minimum wage , or have income less than or equal to 150% of the poverty line for your family size and state (about $26,000 for a family of two).

Both options, in addition to general forbearance, are available for up to three years, and you can use a combination of deferment and forbearance for up to nine years. Interest may continue to accrue while payments are on hold, depending on the type of loan you have. A subsidized loan or Perkins loan, for example, won’t accrue interest while you are impatient or deferred. For other loans, interest accrued while payments are suspended will likely be added to the loan balance at the end of the deferral or forbearance period.

Prepare to pay. Once you have decided your path forward, calculate your payment. For federal loans, you can use the loan simulator at https://StudentAid.gov/loan-simulator. If you haven’t already verified, make sure your loan provider has your current contact information. If you sign up for Automatic Payments, you may be asked to confirm that your bank account information has not changed.

Another step to consider before the federal payment suspension ends is whether to request a refund after March 13, 2020. Any payment you made while payments are on hold can be refunded, which is helpful if you need the money or think you will in the future. Contact a loan service officer before September 30th. Call centers may be busy, so you may get better results by using the lender’s online contact forms.

Finally, beware of scams. The Department of Education says student loan borrowers have received phone calls, emails, letters and texts warning them that the suspension program will end soon and offer debt relief. Usually, companies that provide these types of services offer no relief, and some are scammers looking to take advantage of vulnerable borrowers.

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