Student loans payments paused (again), but should I….
Prepare for the end, hope for cancellation or refinance?!
Well, it’s happened again. The Biden administration has paused (deferred) federal student loan payments, making it the sixth extension since March of 2020. This time, the moratorium is scheduled to expire on August 31, 2022. Deep sighs of relief all around for millions of borrowers. But, the announcement has brought about a resurgence of three common questions from the Broke Millennial community.
How can I prepare for when the deferment does come to an end?
Will Biden cancel/forgive all student loans?
Should I refinance my student loans during the pause?
Now, before we get to my answers, I have two important pieces of newsletter "housekeeping".
First, I apologize for the double blast of my newsletter(s) last week. It was not intentional and an unfortunate internal glitch from Substack that caused newsletters to be sent out twice for many Substack creators. I’ve been assured the issue is fixed and it won’t happen again, but know that I will never deliberately blast you multiple times with the same newsletter.
Second, I’m currently on day three of recovery from a heinous stomach bug. There is a good chance I might have some typos in this newsletter because of sickness induced brain fog, so please forgive them! Also, stay healthy and don’t cuddle with your nephew if he’s sick… #LessonsLearned
Now, onto the answers!
1. How can I prepare for when the deferment/pause does come to an end?
I’m a big fan of simulated budgets. That means you start to budget for a planned/potential expense well before it actually happens. For example, when Peach (my husband) and I were ready to move – we started budgeting as if we were already paying more in rent. We increased our rent by $300, because that was the high-end of our rent budget, and adjusted the rest of our budget accordingly. The “extra” money went into a savings account that started accumulating for the cost of moving.
Let’s say that you owe $300 per month on your student loans. Right now, you should create a budget that simulates putting $300 towards that debt. In reality, you put that $300 into savings. (Spoiler: This is also a good way to build or rebuild your emergency savings fund.) Eventually, you may even elect to put that savings towards your debt in a lump sum payment if you feel comfortable with your savings buffer.
The point is that you get used to having less to live on, save and invest each month because you’re already simulating the experience so it won’t be a shock to the system when it happens.
2. Will Biden cancel/forgive all student loans?
I wish I could confidently tell you that yes, that will happen. Unfortunately, you and I have the same amount of information about that. Personally, I don’t believe all federal student loans will be forgiven, but I wouldn’t be surprised if between $5,000 - $10,000 per borrower does get canceled. Remember, this is just for federal student loans, not private!
Federal student loans: Offered by the government. Your federal student loans can be found here at studentaid.gov.
Private student loans: Offered by a private lender (e.g. Citizens, PNC, Discover, Sallie Mae) .
And in a frustrating twist, your student loans can be sold, which means your provider can (and likely will) change over the life of your repayment.
Soap box moment: If you’ll permit me a moment to share my thoughts on student debt cancellation. Peach and I paid off $51,000 in student loans after getting married and I have ZERO issues with debt being forgiven for other borrowers. I think about the amount of good it could do for people we know. The economic freedom and choices it would give them. The brain power it would free up to focus on other things. The mental health benefits. Just because Peach and I had the economic privileges to pay off that debt doesn’t make me begrudge anyone having the opportunity to have their debt canceled.
3. Should I refinance my student loans during the pause?
(First, a quick clarification on refinancing for those unfamiliar. In simple terms, refinancing is when you take out a new loan to pay off and close an old loan. I know it sounds a bit odd, but the point is that your new loan is at a lower interest rate and will ultimately save you money over the life of the repayment. You pay off your old loan and just have the one, new loan to repay.)
If you refinance federal student loans with a private company (like a SoFi or Citizens Bank or Earnest or LendKey or CommonBond) you are turning those federal student loans into a private loan. Making your federal loans private loans means you are no longer eligible for federal perks. Those perks include income-driven repayment plans, deferment/forbearance, and student loan forgiveness.
Honestly, I would be very hesitant to refinance any federal student loans right now. One, because it means you have to make payments on the newly minted private loans you’ll create instead of continuing to have your federal student loans paused. And two, because in the off chance that all borrowers get a particular sum forgiven, like $10,000, you will have lost out.
If you want to work on knocking out your debt, then you can always be making payments on the loans during the pause.
Use a simulated budget to start preparing for when the student loan pause will end. Use the money you saved as a lump sum payment towards your debt or to bolster your savings.
Personally, I don’t believe all federal student loans will be forgiven, but I wouldn’t be surprised if between $5,000 - $10,000 per borrower does get canceled.
I would be very hesitant to refinance any federal student loans right now.
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