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Should You Pay Off Student Loan Debt Or Wait For Forgiveness?

  • The cancellation of the federal student loan has been discussed by the Biden administration, but is not a lock.
  • Aggressively repaying student loans while COVID-19 forbearance can save you money in the long run.
  • The government currently has reinstatement programs, such as the civil service loan forgiveness.
  • Learn more about Personal Finance Insider student loan coverage here.

You may have a hard time deciding what to do to pay off your student loans, given the nationwide conversation about potential student loan cancellation over the past year.

While it is not a good idea to bet on canceling your loans, you should have a plan in place for various scenarios.

Expect – but don’t count on – the forgiveness of the Biden administration

Much of the focus on canceling federal student loans has focused on President Biden’s campaign pledge to write off student debt. Politicians and activists have campaigned for the administration to write off a debt of $ 10,000 to $ 50,000, although the federal government has yet to guarantee any action and is still reviewing the legality of the cancellation. of student debt by decree.

President Biden could also push Congress to draft a bill forgiving student loan debt, but it is uncertain whether it will pass both the House and the Senate.

Regardless of the potential for debt cancellation, it’s not a good idea to completely stop paying your student loans and hope that your student loans will be canceled. You should have a plan in place to determine your budget in the event of a cancellation, as well as how much you will pay per month if a debt is written off. You also need to determine how you will allocate the extra money that the cancellation would free up.

Make a plan for the COVID-19 forbearance period

Federal student loans are currently on hold until January 31, 2022, so you won’t be paying interest and making any payments on your loans until then. However, if you have the extra cash, you could have a golden opportunity to save money on your student loans.

If you choose to make payments before the forbearance ends, they will go directly to the principal or balance of your loan. This will lower your overall cost when the interest starts up again because you will be paying interest on a smaller loan amount. The more aggressively you pay off your debt now, the less interest you will pay over the life of your loan.

Watch the civil service loan forgiveness

Keep in mind that the federal government has already put in place forgiveness programs for certain subsets of borrowers, including the Public Service Loan forgiveness program (PSLF). PSLF cancels the debts of graduates employed in the public sector after a minimum of 10 years of service and qualifying payments. Your particular job doesn’t matter, only that you work for a public service employer. There is no limit to the amount of money that can be forgiven.

During forbearance, your $ 0 payments still count towards your eligible monthly payments as if you had continued to repay your loans during the break, as long as you are still working for an eligible employer. From the start of the payment freeze in March 2020, you can get almost two years of “free” qualifying payments, bringing you much closer to loan cancellation.

You’re better off paying as little as possible in this scenario and spending all the extra money on an emergency fund, high interest debt, or retirement savings.

What if you’re struggling to pay off your debts or have private loans?

If you’re struggling to keep up with your federal student debt and can’t afford your monthly payments, you may want to consider applying for an income-based repayment plan. Income-based repayment plans take your specific income and family size into account when calculating your monthly payments, and in some scenarios you can pay as little as $ 0 per month.

Private student loans are not eligible for student loan cancellation programs and would not be affected by a student debt cancellation from the Biden administration. They are also not eligible for income-tested repayment plans. You may be able to apply for forbearance from your loan provider, but even if it is granted, interest is likely to continue to accrue during this time.

Your best option for saving money on private student loans is probably to refinance them. If your credit rating and financial situation have improved since you first took out the loan, you may be eligible for a lower interest rate.

While federal student loan cancellation is certainly a possibility, you should never rely on a potential forgiveness instead of budgeting that takes into account your monthly student loan payments.

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