Mastering Student Loan Debt
RALEIGH, NC — Much is still being said about President Joe Biden’s plan to eliminate massive amounts of student loan debt for tens of millions of Americans.
Biden announced a plan to cancel up to $20,000 in federal debt for most borrowers while extending the repayment freeze.
Raleigh financial expert Alex Sutherland of LifePlan Group explained what this means for borrowers and how to maximize the opportunity.
Q: Who will be eligible for loan forgiveness?
- In August, President Joe Biden announced his plan to cancel student loans. Americans with an annual income of $125,000 or less would have $10,000 in federal student loans forgiven.
- Those with a Pell grant, which is usually given to low-income students, would have $20,000 of debt forgiven.
- This proposal comes after months of debate over how to solve the student loan crisis.
- More than 40 million Americans are struggling under the strain of student debt, collectively owing $1.7 trillion for their education.
- Those with student loan debt often have to put off major financial decisions, like buying a home or saving for retirement.
- Student loans are not just a problem of young people. Older Americans are going into debt even faster than their younger counterparts. 2.4 million Americans age 62 and older owe $98 billion in student loans.
Q: How much will it cost to cancel a student loan?
- An economic study estimates that a forgiveness of $10,000 per borrower would eliminate $321 billion in student loan debt.
- Depending on how the details of the program are implemented, the proposed student loan forgiveness plan would cost the government more than $400 billion.
- During Biden’s tenure, existing remission programs have already forgiven about $32 billion in student debt.
Q: When will the refund freeze end?
- Loan repayments were due to resume for millions of borrowers after August 31. However, Biden extended the reimbursement freeze until December 31.
- Although the freeze is still in place, those in the repayment phase of their loan are not required to make regular payments and their balance will not accrue interest during this period.
- The freeze only applies to federal loans, which represent 92% of outstanding student debt.
- When payments resume, the Department for Education has proposed a maximum payment of 5% of a borrower’s Discretionary Income, reduced from the current maximum of 10%, which applies to any borrower using a repayment plan based on income.
- Under these new regulations, borrowers making regular monthly student loan payments will have their outstanding monthly interest waived.
Q: Should borrowers continue to make payments during the freeze?
- Biden has signaled this will be the last extension, meaning borrowers should prepare to resume payments in early 2023.
- It’s important to plan ahead and use smart financial strategies to make sure you don’t fall behind when repayment begins.
Prepare for reimbursement
- If you can, keep paying off your student loan. If you get into the habit now, you can prepare your budget so you won’t be caught off guard when payments resume.
- You don’t want to be hit with late payment fees, or worse, be in default. You can set up a direct debit to avoid missing a payment. Many repairers will give you a small interest rate reduction for setting up autopay.
- If you are in financial difficulty, consider taking advantage of the freeze.
- A calculator can help you get a realistic idea of how much student debt you’re carrying and how long it will take to pay it off.
Build up your savings
- It’s tempting to avoid saving money to pay off your loans, but graduates will regret it later.
- Saving early — even if it’s just a small amount — is crucial, as it allows the money to grow through compound interest.
- We recommend that you save at least 10% of your salary in your employer-sponsored 401(k) plan. If you can’t handle that, consider contributing at least enough to get the company match.
- Hopefully, student loan forgiveness will give you a head start in freeing yourself from debt. Once you’ve reached this goal, be sure to increase your savings for retirement.