The 46th President of the US, Joe Biden, has paused federal student loan payments and interests until September 2021 using his executive powers. This hold has posed questions for those who want to pay off student loans.
- What does this mean for you? What should you do?
- Relax and skip payments on your student loans?
- Make payments on your student loans?
- Try to pay off student loans without hurting your budget?
What should you do?
The answer is a simple one.
You should pay back student loans without hurting your budget. Here are a few reasons behind it.
- Debts still exist: Joe Biden has not forgiven your student loans permanently. You have to pay off the loans later.
- No relief from private student loans: Joe Biden has paused payments only on federal student loans. If you have private student loans, you will have to make payments unless lenders offer a forbearance plan.
- Lead a stress-free life: The sooner you will get out of student loan debt, the sooner you can purchase a house or get married. You will enjoy complete financial freedom.
- May not get relief from bankruptcy: You cannot discharge student loans in bankruptcy unless you pass the Brunner Test.
- You can get out of student loans fast – Since the student loan interest rate is zero right now, a portion of your money will go toward the previously accrued interest. The rest of the amount will go towards the principal student loan balance. If you make payments on your student loans in the next eight months, you can get out of student loans faster. You will save money on the interest too.
Tips to pay off student loans no matter how much money you have
Here are some tips to pay off student loans in 2021.
Tip 1: Calculate how much you owe
Check how much you owe on your student loans from the loan servicers’ websites. Note them down in a Google doc. Check if you have any private student loans. Loans that are not in the National Student Loan Data Center are most likely private loans.
Tip 2: Reduce your interest rates
The interest rates on federal student loans usually vary between 3% and 5%. The interest is lower than the credit cards and payday loans. However, every penny counts during an uncertain economic situation. If you can lower your interest even by 1 percent, you will save money.
Here are some ways to lower your interest on student loans.
(a) Opt for student loan refinancing: You can get a lower interest rate on both private and federal student loans with a student loan refinance—all you need to have a good credit score and a stable income.
(b) Negotiate with your student loan servicer: Call your loan servicer and negotiate for a lower interest on your private student loans due to your financial hardship. But in this case, you may have to itemize your adjusted gross income and expenses to prove your financial problems. The private loan servicer wants to be sure of the fact that you are in financial distress.
If you can negotiate well, the lender may lower your interest rate anywhere between 15% and 5%.
You can even automate your payments to get a more significant discount on your student loans. Some lenders may agree to cut down your rate further by 0.25% when you set up automatic payments.
Tip 3: Explore all repayment options
If you cannot afford the interest and payments, you can explore the following repayment plans. Keep in mind that these are only repayment plans with a student loan forgiveness option.
Pay as You Earn (PAYE) – This student repayment plan allows you to pay as you earn on loans issued after October 1, 2007, and before July 1, 2014. You can apply for forgiveness after 20 years.
Revised Pay as You Earn (RPAYE) – This repayment plan is almost like that of PAYE. You can apply for forgiveness after 20 years of undergraduate loans. For other graduate loans, you can request forgiveness after 25 years.
Income-Based Repayment Plan (IBR) – In this loan repayment program, you have to pay only 10% of your monthly income for student loans. If you fail to pay off the loan even after 20 years, you can request the government to forgive the remaining amount.
Income-Contingent Repayment Plan (ICR) – In this repayment option, you have to pay 20% of your monthly income, and that is the maximum amount. But before you opt for this repayment plan, you have to consolidate all your loans. You can apply for forgiveness after 25 years.
Words of wisdom to pay off student loans
You will also have to update your income details and family size each year to reconfirm your standard repayment plan eligibility.
Making extra payments on your debts will help you chip away the principal amount fast and get rid of the student loans early. You accomplish this goal by making a payment every two weeks.
If you receive a financial windfall or tax refund, use it to pay off student loans quickly. Try to avoid wasting it on useless expenses.
Tip 4: Opt for Public Service Loan Forgiveness Programs
If you are a government employee, you can apply for the Public Service Loan Forgiveness (PSLF) program. You can get your Direct loans forgiven after 120 qualifying monthly payments.
Tip 5: Take steps to make more money
The more money you put into your student loans, the sooner you can get out of debt. Do a side-hustle in your free time to make more money.
Focus on your career and complete all your job responsibilities within the deadline. Impress your boss so that he gives you a pay hike when you ask for it. Otherwise, you can look for a better job with a high salary. But before you switch jobs, make sure you check if your current employer or the next company offers student loan repayment assistance.
Tip 6: Save money and create an emergency fund
Formulate a budget plan to allocate your money in the right areas. Cut down your useless expenses to save money every month. Use it to build your emergency fund. Whenever you have emergency expenses, you can use the funds to cover them instead of using high-interest credit cards or using the money you have saved for student loan payments.
How to choose the best student loan repayment plan
You can use a student loan payoff calculator to calculate how much you can save with each repayment plan. Choose a plan that helps you save the most on your student loan.
Do you have to pay tax to the IRS?
You will have to pay income tax on the total forgiven amount. You have to pay the entire amount to the IRS. Otherwise, they will impose penalties and additional fees.
Debts impose a financial burden on your shoulder. The sooner you eliminate credit card debt, student loan debt, payday loan debt, the sooner you can start leading your life on your terms. Lead a frugal life, cut down your expenses, save money, create an emergency fund, choose a feasible repayment plan, and make extra payments to get out of student loans.