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- The Biden administration has extended the pause for student loan repayments through 2023.
- You don’t have to make payments on your loans during the break, but doing so will save you money.
- Student loan forgiveness is contested in court and is not guaranteed. He makes a plan to pay back.
With the Biden administration’s student loan forgiveness plan stalled in court, the government is once again extending the repayment pause that has been in place since March 2020. But for many borrowers, the smart move would be to make the payments anyway.
Biden’s plan is to forgive $10,000 in student loans for single borrowers making $125,000 or less and married couples and heads of household making less than $250,000. The pardon amount will be $20,000 for Pell Grant recipients. While the latest break may mean you won’t have to make payments until the end of August 2023, making payments on balances that exceed the forgiveness amount in the meantime can save you a lot of money.
“If you have student loans, you should start paying them off, but consider leaving the last $10,000 or $20,000 until the court cases resolve themselves,” said Jay Zigmont, a CFP® practitioner and founder of Childfree Wealth. “The benefit of paying off your loans now is that the entire payment will go to principal. If you’re down to the last $10,000 of loans, consider putting the payment into a savings account that can be used or put toward the loan once you pay off your loans.” We’ll have an answer about forgiveness.”
The Department of Education said student loan payments would resume 60 days after the lawsuits contesting it are resolved or, if they haven’t been resolved by June 30, 60 days later.
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Why should I make student loan payments now?
Typically, when you make loan payments, you’re not only paying off the balance of your debt, but also the interest on the principal. This can occasionally lead to borrowers making payments on time with an increase in the loan balance because their payments only cover a portion of the interest and do not reduce the principal at all.
If you make student loan payments during your break, all of the money goes towards reducing your principal. This will help you reduce your debt faster than if you are in a normal repayment period because you will be paying interest on a smaller amount of debt when payments resume. This means that overall you will pay less interest than if you had made no payments during this period.
Example of student loan repayment
For example, suppose you have an initial loan balance of $30,000. Here’s how much you could have saved if you had continued to make regular student loan payments for the duration of the repayment break.
To calculate savings, we use a flat interest rate of 5% and the average student loan debt for borrowers. This equates to a monthly payment of $318. For easier calculations, we assumed a three-year repayment pause, which would take us to March 2023.
If you had continued to make your regular monthly payments for those three years, you would have saved more than $3,000 over the life of your loan.
Now, if you haven’t made any payments but want to get started, here’s an example of how much you can still potentially save between now and the end of August.
While that may not seem like a lot, $781 in savings is still significant if you can get your student loan payments back into your budget.
“When student loan payments start again, many are having a tough time,” Zigmont said. “Start now by making monthly payments of $50 or $100 on your student loans. Increase the amount each month and you’ll not only make room in your budget, but you’ll also make progress toward paying back your loans.”