Five Student Loan Tips for September 2021

President Biden gave borrowers one last extension on the Covid-19 student loan relief programs.

The federal government will continue to charge 0% interest on federally held student loans, and payments remain suspended until February 2022. The bad news is that Biden made it clear that this is the final extension.

There are several ways borrowers can maximize the remaining relief and prepare for the student loan repayment restart in 2022.

This month, I’m also closely watching the Biden administration as they consider major student loans changes. These major changes on the way for federal loans potentially include creating a new federal repayment plan.

Tip #1: Keep an Eye Out for Student Loan Forgiveness

There is still a tiny glimmer of hope for student loan cancellation.

In April, President Biden directed Secretary of Education Miguel Cardona to prepare a memo addressing the legality of the President erasing student debt with an executive order.

It has been a heated debate among Democrats. Previously, Biden has argued that he didn’t have the authority to forgive the debt. The request for a memo means there is hope that he is willing to change his mind.

Unfortunately, there haven’t been any developments on the forgiveness memo since April. Initially, it sounded as though an update would come within a few weeks. The passage of several months probably isn’t a good sign for borrowers.

With federal interest rates currently set at 0%, there isn’t any harm to sitting back and seeing how the next month develops.

For a detailed explanation on the ability of the President to cancel student loan debt, check out this legal analysis.

Tip #2: Don’t Make Federal Student Loan Payments Right Now

Some borrowers and finance experts suggest that the 0% interest is an opportunity to knock out student loan debt. The idea is that borrowers who can afford to make payments continue to make payments. At the end of the interest freeze, these borrowers will have significantly reduced balances.

While I see the merits of this approach, I think there is a better way of doing it. Rather than giving the money to the government, borrowers should use the opportunity to build up their emergency fund. Ideally, all student loan borrowers should have an emergency fund. The interest freeze provides a chance to make sure sufficient funds are available. Any planned federal student loan payments belong in this fund.

At the end of the interest freeze, borrowers can make one large payment on their student loans. If things go as planned, the result will be the same as if they continued making monthly payments.

However, there are two significant advantages to delaying the payments until the very end:

  • Borrowers can earn interest on their money. This is the rare instance where a high-yield savings account will pay a higher interest rate than what a student loan charges. By being patient, borrowers can earn some money,
  • Borrowers get flexibility. This is the big one. If you lose your job or get sick and face substantial medical bills, you will be glad you kept the money.

The one exception to this suggestion would be the borrowers who don’t think they have the self-control for this strategy. If making regular monthly payments seems easy, but you fear you wouldn’t send in the large payment at the end, stick with making regular payments.

Tip #3: Ask for a Refund on Your Previous Federal Payments

This tip is a continuation of the previous one.

If you made unrequired payments during the interest freeze, you might be able to get a refund for that payment.

Getting a refund only to return the money in eight months may seem like a waste of time. For many borrowers, it would be a waste of time.

However, having extra money in reserve, even if only for a short period, could be significant. If you are a couple of bad breaks from dire financial circumstances, getting a refund is worth the effort.

Tip #4: Start Thinking About the Repayment Restart Next Year

We are still about five months away from federal student loan payments resuming.

However, when that day comes, borrowers will have a tough time calling their servicers and getting help. The servicers estimate that in one month, they will get more calls than they usually receive in a year.

Combine that with the fact that servicers laid off staff at the beginning of the pandemic, and you have the ingredients for a challenging situation.

Borrowers that plan ahead and get their questions answered in advance can avoid the mess.

Tip #5: Now is a Great Time to Refinance Private Student Loans

For nearly a year, I’ve been telling borrowers not to refinance their federal loans. The big benefit of refinancing is getting lower interest rates, and no refinance company can beat the 0% offered on federally-held student loans.

The refinance companies have been feeling the pressure. With fewer borrowers looking to refinance their loans, competition has gotten intense. As a result, interest rate offerings have been very aggressive, which means lower rates for borrowers.

I know that many borrowers like to opt for shorter-term loans with lower interest rates, but if I had to refinance my private loans right now, I’d select a 20-year fixed-rate loan.

Here again, I tend to be conservative and prefer flexibility. A longer loan means a slightly higher interest rate but much lower minimum monthly payments. However, borrowers can always pay more than the minimum required. The benefit of a low minimum is the protection it offers in lean months.

At present, the following lenders offer the lowest rates on 20-year fixed-rate loans:

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