How Should Student Debts Be Repaid? Prepare, What You Should (and Shouldn’t) Do is Listed Below!

The grace period on your student loans will end in a matter of months, but there’s no need to worry just yet. Borrowers can lessen the blow to their wallets in a number of ways.

On Friday, the Supreme Court ruled against former Vice President Joe Biden’s plan to forgive $10,000 in federal student loans, including Parent Plus loans, to individuals and families with annual incomes of less than $125,000 or $250,000, respectively.

Those who qualify for a Pell Grant would have an additional $10,000 in debt cancelled because they have shown a greater need for financial assistance.

On the same day, the White House announced, the Department of Education had completed “the most affordable repayment plan ever created,” offering borrowers more flexibility in lowering their monthly payments. We’ll break down the new repayment schedule and give you some more planning tools here.

The tweet below verifies the news:

Student loan payments are set to resume this fall after a three-year freeze. Here are options you should consider to prepare. https://t.co/TZpJnl82x0

— USA TODAY (@USATODAY) July 3, 2023

What’s “the Most Affordable Repayment Plan Ever Created”?

The White House has announced that beginning this summer, borrowers would have access to an income-driven repayment (IDR) option called the Saving on a Valuable Education (SAVE) plan.

Here are some key details: 

• Undergraduate loan payments will now only require 5% of borrowers’ discretionary income, down from 10% previously. A single student borrower making $50,000 per year, for instance, would have their payments reduced by an additional $72 per month under the SAVE plan, for a total monthly savings of $163.
• Increase the amount of your income that is subject to taxation, reducing the amount of your income that can be used for student loan repayment. According to the White House, this ensures that “no borrower earning under 225% of the federal poverty level” (about the annual equivalent of a $15 minimum wage for a single borrower) will be required to make a monthly payment under this proposal. The government estimates that even borrowers who aren’t offered a zero-interest rate will save at least $1,000 per year.
• For loans of $12,000 or less, the balance should be forgiven after 10 years of payments instead of the standard 20. The U.S. Department of Education predicts that after ten years, the vast majority of community college borrowers will have paid off their loans.
• Interest should not be compounded monthly if the borrower is current on payments. The majority of borrowers who were already participating in an IDR program before the payment freeze could profit from this, according to the Department of Education.

See this post from the California Examiner for more on recent events in the United States:

• Important Things You Need to Pay Attention to as Student Loan Payments Start
• Customer Service Hours Reduced by Student Loan Servicers Ahead of Payment Restart

What Else Can I do to Prepare to Start Repaying?

• Put into a savings account The money you’d spend to pay back your student loans each month should be saved in a savings account where it can collect interest until it’s needed. There are already some online savings accounts that pay around 5% interest.
• Check your employee benefits: Aetna, PwC, and Google all make matching contributions toward employees’ educational debts of up to $2,000 annually, $1,200 annually for associates and senior associates respectively, and up to $2,500 annually for qualified loans in the United States.
• Cut expenses and pick up a side hustle: Reduce your outgoings and start a side business. The Institute of Student Loan Advisors is a non-profit organization situated in Plymouth, Massachusetts, and its president, Betsy Mayotte, recently advised borrowers to reassess their spending habits, develop a budget, and establish a new routine that includes setting aside money each month to pay down their student loans.
• Check if you’re eligible to lower your payments with a new plan: Find out if switching to a different plan could reduce your monthly costs. If you need help deciding what to do, you may either talk to your servicer or use the Loan Simulator. Find out the cost of your monthly payments and make sure you can comfortably make them.
• Know what your payments will look like and whether you’ll be able to afford them: If not, and if you don’t qualify for forgiveness, a financial expert like Randy Lupi from Equitable Advisors suggests refinancing at a lower interest rate if possible before payments resume. A loan that has been refinanced with a private entity cannot be forgiven under any federal scheme, he warned.
• Check your eligibility for other government loan forgiveness programs: “For example, individuals in the non-profit field likely qualify for Public Service Loan Forgiveness, which does not have a cap on the amount of forgiveness and should take this time to make sure they are properly enrolled,” Lupi said.
• Consult with a trusted advisor: Anyone burdened by student debt can benefit from consulting a trusted advisor or mentor about their best course of action. The Institute of Student Loan Advisors and the Student Borrower Protection Center are just two of the many organizations listed on the Federal Student Aid website that can put you in touch with a qualified counselor.

If you want to know more about recent events in the United States, check out this article from the California Examiner:

1. 93% of student loan borrowers aren’t ready to begin paying again. Inflation could make it also worse
2. Parents Can Also Qualify for Student Loan Forgiveness! Here’s How

• Consider paying your loan down before repayments start: Citizens Bank’s head of national banking and lending, Eric Schuppenhauer, explained that because the interest rate on student loans is zero during the deferment period, every dollar you pay goes straight toward your debt. You can save interest and pay off your loan sooner if you borrow less money.
• Enroll in autopay with your servicer: Get on your servicer’s autopay list immediately. You won’t have to worry about missing any payments or incurring any late fees or penalties thanks to this. Kelly Gilbert, an investment advisor with EFG Financial in Grand Rapids, Michigan, said this. A quarter of a percentage point is subtracted from your interest rate by the servicer.
• Contribute to retirement accounts to lower payments: “If you participate in an IDR plan, contributing to a retirement account can lower your adjusted gross income, which would ultimately lower your monthly student loan payments,” Gilbert said.
• Look for other forgiveness programs: There are state-based student loan forgiveness programs in place in 47 states and the District of Columbia. Most cater to persons with certain skill sets (such doctors, teachers, police officers, and farmers) or those who volunteer to work in areas with an extreme shortage of those skills. For some employers, debt forgiveness is contingent on the employee being on the job for a minimum amount of time. The programs offered in those states are detailed on this page.

What should I NOT do?

Avoid using credit cards for payment: The interest rate on your credit card is probably higher than the interest rate on your student loans, Gilbert said. Paying off debt with a credit card will have a negative impact on your finances. It could also place you in an unmanageable amount of debt.

Never pay for help with your federal student aid: The Department of Education warns that scammers may approach you and offer to assist you acquire a loan discharge, forgiveness, cancellation, or debt relief for a price. With your federal student aid, you will never have to pay for assistance. To paraphrase the U.S. Department of Education, “Make sure you work only with the U.S. Department of Education, the office of Federal Student Aid, and our loan servicers, and never reveal your personal information or account password to anyone.”