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- The Biden administration has extended the student loan repayment pause until 2023.
- You don’t have to make loan payments during the break, but it will save you money.
- Student loan forgiveness is challenged in court and is not guaranteed. Make a plan to repay.
With the Biden administration’s student loan forgiveness plan stalled in court, the government is once again extending the repayment pause in place since March 2020. But for many borrowers, the smart move would be to make payments of any way.
Biden’s plan is to forgive $10,000 in student loans for single borrowers who earn $125,000 or less and married couples and heads of households who earn less than $250,000. The rebate amount will be $20,000 for Pell Grant recipients. While the latest break may mean you won’t have to make payments until the end of August 2023, making payments on balances that exceed the cashback amount in the meantime can save you a lot of money.
“If you have student loans, you should start paying them off, but consider leaving that last $10,000 or $20,000 until the court cases sort themselves out,” said Jay Zigmont, a PSC.® professional and founder of Childfree Wealth. “The bonus of paying off your loans now is that the entire payment goes to the principal. If you only have $10,000 left in loans, consider putting the payment into a savings account that can be used or allocated to the loan. once we have an answer on forgiveness.”
The Department for Education said student loan repayments would resume either 60 days after the lawsuits are resolved or, if not resolved by June 30, 60 days after that.
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Why should I make student loan payments now?
Typically, when you make repayments on loans, you’re not only paying off your debt balance, but also the interest on your principal. This can sometimes cause borrowers who make payments on time to see their loan balance increase because their payments only cover a portion of the interest and do not reduce the principal at all.
If you pay off your student loan during the break, all the money goes to reduce the principal. This will help you reduce your debt faster than when you’re in a regular repayment period because you’ll pay interest on a smaller amount of debt when payments resume. This means that you will pay less interest overall than if you had made no payments during this period.
Sample Student Loan Repayment
For example, let’s say you had an initial loan balance of $30,000. Here’s how much you could have saved if you had continued to make regular student loan payments for the duration of the repayment break.
To calculate savings, we use a fixed interest rate of 5% and borrowers’ average student loan debt. This equates to a monthly payment of $318. For simpler calculations, we assumed a three-year repayment pause, which would take us to March 2023.
If you had continued to make your regular monthly payments for those three years, you would have saved over $3,000 over the life of your loan.
Now, if you haven’t made any payments but want to get started, here’s an example of how much you can still potentially save by the end of August.
While that may not seem like much, $781 in savings is still significant if you can work student loan repayments back into your budget.
“When student loan repayments pick up, many go through a tough time,” Zigmont said. “Start now by making monthly payments of $50 or $100 for your student loans. Increase the amount each month, and not only will you save room in your budget, but you will also progress in paying off your loans.”