January 1st, 2023. That’s when student loan payments, interest, and collections on most federal student loans are set to begin after forbearance is officially scheduled to end on December 31st, 2022. Federal student loan payments have been on pause since March 2020 and scheduled payment restart dates have been pushed back seven (7) times since then. Though another push back could happen again, this time seems unlikely. Being proactive and taking steps now to prepare is prudent. Below are some considerations.
Understand What You Have
Take a moment and collect information on all outstanding loans that you have. It’s possible that you may have loans with more than one loan servicer or your loan servicer may have changed in the past 2.5 years since you last made a payment. Also, make sure all of your contact information is up to date with both your loan servicers and the government (www.studentaid.gov). For those who graduated during the pandemic, this will likely be the first student loan payment you will have had to make. If you have private student loans, then you likely have been making payments throughout the pandemic as the student loan pause only pertained to federal student loans. Check with your loan servicer to determine which repayment plan you are currently defaulted into. They should also be able to answer questions and guide you on other repayment options that you may be able to switch to (especially if the payment for the default option is higher than you might be currently comfortable with). Every repayment option has pros and cons, so be sure to review them prior to opting to make a change.
Review Your Monthly Budget
After almost 3 years of not having to make any payments on federal student loans, it might be jarring when payments resume in January if you haven’t reviewed your monthly budget recently and accounted for a new monthly payment. After determining what your monthly payment is likely to be after reviewing with your loan servicer, take the time now to review your monthly budget. Review your income and expenses, and determine where you can make some adjustments if needed to account for the restart of payments in January.
I have been encouraging clients this year to try to “pay” their student loans each month by moving over what they would have otherwise been paying toward their student loans from a checking to a dedicated savings account. Two reasons for doing this: 1) It helps to get back in the habit of making payments (even if it is just moving money from a checking to a savings account) 2) By making these monthly “payments” to a savings account, they will have accrued a balance that they can use to potentially make a lump sum deposit to pay down their student loan balance right before it begins accruing interest again in January 2023.
What About Forgiveness?
At this time, the Biden Administration has announced plans to forgive up to $20,000 (most eligible borrowers will receive up to $10,000) in federal student loans for qualified borrowers. There are already several legal challenges in the works and things are likely to change and evolve in the coming weeks. As it stands right now, the Department of Education has said that they have the necessary information already on file for roughly 8 million eligible borrowers to receive automatic forgiveness. For everyone else who may be eligible, an application is said to become available in October to supply the required information. Also, although details are still somewhat murky, the Department of Education is coming out with guidance for borrowers who may have continued to pay down or paid off their student loans during the pause and are now eligible for a portion to be forgiven. In preparation, borrowers who think they may be eligible for potential forgiveness should check www.studentaid.gov for updates on the application as well as with their student loan servicer.
Pay Close Attention
The topic of loan forgiveness has been in the news a lot as of this writing, and it is an ever-changing item. With the legal challenges that have been brought up, along with a long period of not needing to make payments, it is easy to not stay on top of what’s happening right now. Loan forgiveness can make a significant difference in many people's financial lives and now is the time for people with potentially eligible loans to pay close attention to what the final resolution is.
Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. LPL Financial and Croxall Capital Planning do not provide tax or legal advice. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.