Financial Planning, Millennials

Federal Student Loan Forbearance Extended

Student loans have become a hot topic over the last decade due to the burden these loans have caused on an entire generation. It is estimated that there are around 15.1 million borrowers with an average balance of $33,000 per borrower. That is a crazy number compared to years before. In 1995, the year I was born, the average student loan balance was $11,500. You may think this change is simply due to inflation, but using inflationtool.com, $11,500 in 1995 would now be worth $19,772 today. The growth in student loan balances far surpasses regular inflation.  

The Biden Administration has seen pressure to do something about this student loan crisis. In response, there is a proposal to wipe out $10,000 of student loans for all borrowers regardless of income. In that proposal, there are talks about also eliminating tuition-related loans for people who graduated from public colleges, HBCU’s, or minority-serving institutions, and who earn less than $125,000 per year. This would be huge for a lot of people. 

It’s important to note that loan forgiveness is only related to undergraduate public student loans that involve the U.S. Department of Education as the lender. Your private student loans will not be forgiven by this nor will your graduate student loans.

At this point we do not know for sure whether this bill will be passed, but as of now, federal student loan payments are suspended until the end of September 2021. This means you are not required to pay on those public loans until then, unless you choose to. Interest will not be accruing during that time, and even if you choose to not pay, these months count towards different loan forgiveness programs as long as you still work somewhere that fits the public loan forgiveness program standards. 

So, how should you handle your loans will all these possible changes? 

Should I Pay Towards My Loans Now? 

Deciding whether you should pay towards your student loans now or not depends on your unique situation as well as your own financial behavior. Before choosing an option, you should consult your financial advisor to figure out what is the best option for you.

However, for those that do not have that luxury, I want to give you a few things to consider. 

First, it is important to know yourself and how you manage money. If you are a good spender and saver, it may make sense for you to not pay towards your student loans and just save that money you otherwise would be paying towards loans in a separate savings account. This way if you end up having to pay those loans, on the day interest starts to accrue again (As of now October 2021) you could put down all of those funds you saved to knock out a chunk of your loans remaining. But, if they end up getting forgiven you now can reallocate those funds to a different goal. This especially can be beneficial if you have less than $10,000 in student loans remaining. There is no reason to pay off your balance if it may all get forgiven later this year. I could argue that you should do this regardless of your remaining balance since interest will not accrue on the loans until October at the earliest. 

I want to remind you that knowing yourself is so crucial. If you are someone that would go spend that money if you see it in your account, then just keep making payments towards the loans. Also, remember that this does not apply to your private student loans, you need to continue to pay those down regardless. 

Speaking of private student loans, if you are considering refinancing your loans to a private lender, it may make sense to hold off on it since private loans will not be forgiven if The Biden Administration implements this plan.

Options You Have Knowing Loan Payments Are Deferred 

For some people it may make sense to use the additional funds that are not going towards student loans for other things. Here are a few good options: 

  • Build an emergency fund with 3 months worth of expenses in it 
  • Be aggressive and pay off high interest debt 
  • If both of those are done, consider just paying towards the loans if you have much more than $10,000 left. 

I will continue to stay on top of this and be back with updates as new information comes available. Stay tuned.

Disclaimer: Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining to your individual situation you should consult your financial advisor. For all of the disclaimers, please see my disclaimers page.