Five Student Loan Tips for August 2021
As we head into the dog days of summer, all eyes in the student loan world are focused on President Joe Biden.
The big question is whether or not he will be extending the federal payment an interest freeze. There are strong arguments on both sides of the debate, and I’d put the odds of it getting extended at about 50/50.
I’m also closely watching the Biden administration as they consider some major changes to student loans. Just when it seemed like Biden canceling federal loans was off the table, there was a new glimmer of hope. Additionally, major changes could be on the way for federal loans, including potentially creating a new federal repayment plan.
Tip #1: Keep an Eye Out for Student Loan Forgiveness
This month I’m suggesting that all federal student loan borrowers prepare for the possibility of student loan cancellation.
It is far from a certainty, but there have been two major recent changes.
President Biden is now seriously considering issuing an executive order forgiving some student loan debt.In the next few weeks, we will hopefully have even more clarity on the situation.
With federal interest rates currently set at 0%, there isn’t any harm to sitting back and seeing how the next month develops. Next month we may have a realistic timeline for some debt cancellation, or we may not for certain that it won’t be happening during the Biden presidency. Either way, this is a situation worth monitoring closely.
For a detailed explanation of the current status of federal loan forgiveness, check out this article.
Tip #2: Don’t Make Federal Student Loan Payments Right Now
President Biden issued an executive order extending the interest rate freeze until October for all federally-held student loans.
Some borrowers and finance experts suggest that the 0% interest is an opportunity to knock out student loan debt. The idea is that borrowers who can afford to make payments continue to make payments. At the end of the interest freeze, these borrowers will have significantly reduced balances.
While I see the merits of this approach, I think there is a better way of doing it. Rather than giving the money to the government, borrowers should use the opportunity to build up their emergency fund. Ideally, all student loan borrowers should have an emergency fund. The interest freeze provides a chance to make sure sufficient funds are available. Any planned federal student loan payments belong in this fund.
At the end of the interest freeze, borrowers can make one large payment on their student loans. If things go as planned, the result will be the same as if they continued making monthly payments.
However, there are two significant advantages to delaying the payments until the very end:
Borrowers can earn interest on their money. This is the rare instance where a high-yield savings account will pay a higher interest rate than what a student loan charges. By being patient, borrowers can earn some money,Borrowers get flexibility. This is the big one. If you lose your job or get sick and face substantial medical bills, you will be glad you kept the money.
The one exception to this suggestion would be for the borrowers who don’t think they have the self-control for this strategy. If making regular monthly payments seems easy, but you fear you wouldn’t actually send in the large payment at the end, stick with making regular payments.
Tip #3: Ask for a Refund on Your Previous Federal Payments
This tip is a continuation of the previous one.
If you made unrequired payments during the interest freeze, you might be able to get a refund for that payment.
Getting a refund only to return the money in eight months may seem like a waste of time. For many borrowers, it would be a waste of time.
However, having extra money in reserve, even if only for a short period, could be significant. If you are a couple of bad breaks from dire financial circumstances, getting a refund is worth the effort.
Tip #4: Start Thinking About the Repayment Restart this Fall
We are still about three months away from federal student loan payments resuming.
However, when that day comes, borrowers will have a really hard time calling their servicers and getting help. The servicers estimate that in one month they will get more calls than they normally receive in a year.
Combine that with the fact that servicers laid off staff at the beginning of the pandemic and you have the ingredients for a very difficult situation.
Borrowers that plan ahead and get their questions answered in advance can avoid the mess.
It is possible that we will see yet another extension, but it is already August and October 1, will be here fast, so my tip for student loan borrowers is to get ready.
I’d expect that we hear something definitive on this issue in the next month. Loan servicers have to mail out bills in advance of the due date. If payments restart on October 1, bills have to go out in early September.
Tip #5: Now is a Great Time to Refinance Private Student Loans
For nearly a year, I’ve been telling borrowers not to refinance their federal loans. The big benefit of refinancing is getting lower interest rates, and no refinance company can beat the 0% offered on federally-held student loans.
The refinance companies have been feeling the pressure. With fewer borrowers looking to refinance their loans, competition has gotten intense. As a result, interest rate offerings have been very aggressive, which means lower rates for borrowers.
I know that many borrowers like to opt for shorter-term loans with lower interest rates, but if I had to refinance my private loans right now, I’d select a 20-year fixed-rate loan.
Here again, I tend to be conservative and prefer flexibility. A longer loan means a slightly higher interest rate, but much lower minimum monthly payments. However, borrowers can always pay more than the minimum required. The benefit of a low minimum is the protection it offers in lean months.
At present, the following lenders offer the lowest rates on 20-year fixed-rate loans:
RankLenderLowest RateSherpa Review1
3.18%ELFI Review2
3.19%CommonBond Review3
3.53%Splash Financial Review
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