Should you pay your student loans or wait for student loan forgiveness?

Should you pay your student loans or wait for student loan forgiveness?

August 16, 2021
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During his run for office, President Joe Biden pledged his support to forgive up to $10,000 in federal student loans for all borrowers(1). Now, several months into his presidency, we have yet to see a meaningful forgiveness of student loan debt and Democrats in Congress want bolder action, forgiving as much as $50,000 per borrower. After leaving student loan debt forgiveness out of his annual White House budget, many borrowers are beginning to wonder if their loans will be forgiven.

If you’re one of the 43 million Americans with student loan debt(2), you may be wondering whether you should wait for your student loans to be forgiven or continue paying them. Here are a few things to consider:

Hope your loans will be forgiven
Although the Biden administration has yet to forgive student loan debt on a mass scale, the administration has been wiping out billions in debt for a small cross section of borrowers. Since taking office in January, the Department of Education has forgiven $3 billion in student loans. To this point, Biden’s focus has been on forgiving debt for targeted borrowers. The latest round of cancellations came for borrowers from 3 different institutions that are now closed and were accused of widespread and substantial misrepresentations to students.(3)

More good news for those hoping for broader student loan debt forgiveness, in early April, the White House requested a review from the Department of Education and Department of Justice that will evaluate President Biden’s authority as President to cancel student loan debt through executive order, without congressional authorization. Until the legal memo is delivered, there are no plans out of the White House for broader, meaningful student loan debt forgiveness. It is important to note that any private student loan debt is unlikely to be forgiven.

Make sure you don’t already qualify for loan forgiveness
With $3 billion in student loan debt already forgiven, the Department of Education has forgiven loans under borrower defense for former students of defunct schools, including ITT Technical Institute and most recently Westwood College, Marinello Schools of Beauty and Court Reporting Institute.3 The Department of Education has also cancelled student loan debt for borrowers with total and permanent disabilities.

If you aren’t a borrower who attended a defunct school or had their loans cancelled because of disability, there is another way your loans may be forgiven, through the Public Service Loan Forgiveness Program. The PSLF Program is available to individuals employed by US federal, state, local government or qualifying non-profit organizations. The program requires borrowers to make 120 months (10 years) of payments before their remaining debt is forgiven.

Although the PSLP isn’t the only loan forgiveness program, borrowers should be cautious for loan forgiveness scams.

Make sure you know all your options for loan repayment
There are multiple federal student loan repayment options. The best one for you will vary based on your individual situation. Federal student loans have the following repayment plan options(4):

Standard Repayment Plan
Graduated Repayment Plan
Extended Repayment Plan
Revised Pay as You Earn Repayment Plan
Pay as You Earn Repayment Plan
Income-Based Repayment Plan Income Contingent Repayment Plan
Income Sensitive Repayment Plan

Private student loans do not qualify for federal student loan repayment programs. If you have private student loans, some private lenders offer borrowers repayment options, so you’ll need to contact your loan provider for details.

It’s best to review and research all of your options when selecting a repayment plan. Contact your loan servicer or financial professional to discuss which options you may qualify for and your options.

Consolidate or refinance your loans
Borrowers who have multiple federal student loans have the ability to consolidate them into one loan, with a fixed interest rate that is based on the average of the loans being consolidated. Consolidating multiple federal loans can simplify your repayment plan by turning several monthly payments into one.

The other option is to refinance your loans. You have the ability to refinance private and federal student loans. By refinancing multiple student loans, you can capitalize on a potentially lower interest rate. It’s important to note that once you refinance federal student loans, they become private loans and will not be eligible for future federal student loan forgiveness programs.

Consider making extra student loan payments before the end of January
Have you been holding off on making student loan payments in hopes of them being forgiven? Under current legislation, the end of the student loan interest freeze will expire January 31, 2022 and interest will start accruing again. With broader student loan forgiveness unlikely before the end of January, now is the time to make those extra payments to pay down your debt faster.

With every student loan debt payment, a portion of the payment goes towards the interest and the remaining portion pays down the principal. Because the current legislation pauses interest from accruing, it is likely that the majority of your payment will go towards the principal owed and reduce your outstanding balance.

Bottom Line
Although the Biden administration hasn’t completely given up on student loan forgiveness, it is unlikely we will see broader forgiveness before the January 31st deadline. Even if the current proposal of forgiving $10,000 of federal student loans is passed, borrowers with more than $10,000 in student loan debt will need a plan for repayment of their remaining loans. There is no guarantee either way and it is always in your best interest to work with a financial professional on your specific situation.

Our Sources
1 Sanford, C. (2020, November 17). Joe Biden speech on economic recovery Plan transcript November 16. Rev. https://www.rev.com/blog/transcripts/joe-biden-speech-on-economic-recovery-plan-transcript-november-16?cjevent=14e89680e4b311eb82a4c7640a82b839&cjdata=MXxOfDB8WXww.
2 Student loan debt statistics. EducationData. (2021, July 25). https://educationdata.org/student-loan-debt-statistics.
3 Yahoo! (n.d.). Biden has now Canceled $3B in student loans, broad debt FORGIVENESS still waits. Yahoo! Finance. https://finance.yahoo.com/news/biden-just-canceled-millions-more-215200906.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAJ_IoeS6EVgu8ChJJI78wwfBXFKE3pJxmZcdNIXqi7RbRZcqr4BSpL_bw-YVwnAy7o1_iE3E7DpmezNETGz_mOxLHEIm0yJLbjB3UPa74ae_ZXTyYkzMp0sBrgjom3EQ884AouaJQvVRvEZyfd3hP6JvIsA00Q86cza5buSPuhD2.

Disclosure
Stephanie Follin is a Registered Representative with and securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.