Should you keep paying your student loans if they might be forgiven?
There’s been a lot of talk lately about the government forgiving federal student loan debt. If you’re one of the 42 million people who has a federal student loan, that’s probably gotten your attention.
At the moment, no one has to make a payment at all on a federal student loan (which accounts for about 92% of all student loans). That’s because the government suspended student loan payments, and interest, at the end of March 2020 due to the financial fallout from COVID-19. That suspension has been extended several times, including most recently through Sept. 30.
Some people, though, are still making their student loan payments. That's partly because the loans aren’t accruing new interest, so all payments are going either toward old interest or the principal of the loan, making it easier to pay down the balance.
“Those who can afford to pay have been making massive strides in knocking down their debt,” said Laurel Taylor, founder and CEO of student loan repayment platform, FutureFuel.io.
If you’re one of those people, you might be wondering — if the government is going to forgive some student loan debt eventually, should I keep paying right now? The answer is…it depends.
Not a sure thing
First, it’s important to know that what student loan forgiveness might look like is still very much up in the air. Many progressive Democrats are calling for up to $50,000 per person in student loan debt forgiveness. President Joe Biden, meanwhile, isn’t sure he can legally wipe away that amount of debt by executive action, but he does support canceling up to $10,000 in student loan debt per person. Forgiveness likely would not apply to the 7.87% of people who have a private student loan, which is one owned by a bank or college.
Biden also supports changes like allowing people to wipe out student loan debt through bankruptcy and lowering the income threshold for student loan repayment plans. He also proposed allowing up to $50,000 in loan forgiveness after five years for people enrolled in the Public Service Loan Forgiveness Program (PSLF) program. Currently, there is no cap on the size of the loan that can be forgiven, but it takes 10 years worth of payments to qualify.
Some of these actions could be done by Biden alone, but many will take legislation, compromise, and time, and others might be non-starters.
“What we’re hearing is that widespread forgiveness is unlikely, and that it will probably be a more targeted form of forgiveness,” Taylor said.
That might mean forgiving $10,000 or less in student loan debt or putting income caps on whose debt would be forgiven. Still, even just forgiving $10,000 in debt would wipe out student loan balances for 16 million people, Taylor said.
“Most of the student loan defaults also occur in people who have less than $10,000 in student loan debt,” she said. “We think it’s a really smart policy to forgive student loan debt that’s unlikely to be repaid anyway.”
But should you keep paying?
Whether it makes sense for you to pay your loans while they are suspended depends on your financial situation.
If you can easily afford to pay your student loans, and you have three to six months worth of money saved up in an emergency fund, you might want to keep making the payments to help bring down the balance. If you don’t have an emergency fund, or you have some high-interest credit card debt you could pay off instead, you might want to wait until after the freeze is lifted.
“In that case, take advantage of the suspension and tuck away what you can for a rainy day,” Taylor said.
To be safe, you should assume that come Oct. 1 you will have to start paying your student loans again. And you absolutely should make those payments. That’s because you can be hit with late fees for missing a payment, and it will appear as a delinquency on your credit report after 90 days. If you don’t make a payment for 270 days, your entire loan balance, including interest, becomes due immediately. That default will also appear on your credit report and your wages could be garnished to pay what you owe.
Consider an income-driven repayment plan
If you’re worried about making your student loan payments, you have options. Think about switching to an income-driven repayment plan, which bases how much you pay on a percentage of your disposable income. That could mean you wind up paying very little or even nothing at all each month. You also might be able to temporarily suspend your loan payments based on your financial situation.
Now is the time to talk to your loan servicer about these options because they will probably be hit with a flurry of requests as the end of the suspension gets closer. (Here’s how to find your servicer.)
“Start exploring your options for what life will look like if payment suspension is over and repayment begins," Taylor said. "There are some fantastic federal repayment options out there."
Read more information and tips in our College section
Read more personal finance information, news, and tips on Cashay
