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Actions Paying Off Student Loan Debt in the New Normal and Beyond
Key takeaways
- Choose income-based repayment if you can’t afford the full amount.
- Refinance high-interest private loans, but think twice with federal loans.
- Monitor interest rates regularly—you can refi student debt multiple times.
When the economic reality of the pandemic first hit, the U.S. government gave most student borrowers a temporary break Opens in new window: If you’re saddled with federal student debt, you don’t have to make payments—and your interest won’t accrue—through April 30, 2022. (Some private lenders have offered their own relief plans, but these programs vary.) But with the omicron variant raging—and the loan forbearance window closing (presumably for good) after April 30, 2022—you may find yourself struggling to stay afloat, let alone paying down your student debt.
Here are some ways to navigate this new normal.
Federal loans
Switch to income-based repayment
If you’re falling behind on federal loan payments, consider an income-based repayment plan Opens in new window.
With these plans, your payments are based on how much you’re earning at the time—and your remaining loan balance is forgiven after a set period, usually 20 to 25 years. (You'll still owe income tax on the forgiven amount at the end of your repayment period; that could be significant if your remaining balance is high.)
There are several options available; in most cases, you’ll pay 10% to 20% of your “discretionary” income toward your loan.
To calculate your discretionary income:
- Look up the federal poverty guidelines Opens in new window for your area and family size.
- Multiply that figure by 1.5.
- Subtract that result from your adjusted gross income (AGI), which you can find on line 8b of your Form 1040.
Even so, in some cases you may have no monthly payments if your debt burden is high compared to your income. (You have to reapply for the income-based plan each year, so this may change if your income increases.) Although having $0 monthly payments won’t reduce your total balance, and you'll still accrue interest, you’ll be able to stay current on your loans and avoid default.
Also, depending on which type of federal loan you have, you may first need to combine your loans with a single Direct Consolidation Loan to qualify for income-based options. This is a relatively simple process: You must complete the online form Opens in new window in one session, but it should take less than 30 minutes.
If your situation stabilizes, you can switch back to the standard repayment plan.
You can find details on federal repayment plans and consolidation at StudentAid.gov Opens in new window.
Consider deferment
If you can’t afford to repay your loans even under an income-based plan, you can apply for an economic hardship or unemployment deferment Opens in new window.
These programs pause payments for a year at a time, and you can renew twice (for three years total).
Even so, note that if you have unsubsidized, Direct PLUS or FFEL PLUS loans, interest may continue to accrue while your payments are deferred. If that's your situation, try to resume payments as soon as you can. The more interest added to your loan balance now, the harder it will be to become debt free later.
Don’t refinance (necessarily)!
You may have seen offers to refinance student loan debt at a lower interest rate. This can be a smart move—but if you have federal loans, think twice before you make it. The reason: When you refinance a federal loan, you do so with a private lender but waive protections like income-based repayment options and deferment.
Private lenders rarely offer these perks, and even when they do, they're not nearly as generous as Uncle Sam. For example, they may offer forbearance that suspends your loan payments—but you'll likely keep accruing interest. (With federal loans, you don’t have to pay interest during the federal forbearance program Opens in new window.)
These days, it’s probably best to keep your federal loans because the government has been willing to waive payments.
Private loans
Consider consolidating and refinancing
Interest rates were attractive before the pandemic, but right now they're downright sexy. In fact, if you’re paying more than 4% on private loans, consider refinancing. For example, if you’re paying 7% interest on $50,000 in loans, refinancing to a 3.5% rate will save you $10,333 in interest over 10 years.
When you refinance private loans, your options will include the same repayment plan, a shorter repayment term with a lower interest rate or a longer repayment term with a higher interest rate. The trade-off: A shorter term/lower rate means higher monthly payments but a smaller overall debt burden; a longer term/higher rate means the opposite—lower monthly payments but more overall debt.
Because the payments are lower, a longer term is more flexible. If you’re not sure your employer will survive the pandemic or you have higher financial priorities, refinance for the longest term possible. Most lenders let you make extra payments without a fee, so you can pay more if you find a little extra in your budget.
When you refinance, you can also consolidate—that is, combine all your student loans into one monthly bill. This can help you track your payments and generally simplify the process.
What you can do next
No matter how you choose to handle your student debt, do your research and weigh your decision carefully. If you want to refinance or consolidate your loans, shop around at multiple private lenders like SoFi, CommonBond and LendKey. Make sure to compare terms, interest rates and fees. If you can’t get a refinance by yourself, see if you qualify with a parent as a co-signer.
If you’re unsure, consider talking to an expert at financial coaching company Student Loan Planner. They can review your current repayment plan, explain the pros and cons of refinancing, and help you if you're working toward public-service loan forgiveness.
Footnotes
Zina Kumok is a freelance writer specializing in personal finance. She has written for the Associated Press, Indianapolis Monthly and more. She also writes a blog about how she paid off her student loans in three years.
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