Federal student loans have been forborne automatically, interest-free for nine months now. Meanwhile, financial advisers have generally advised borrowers who can afford to continue repaying the principal owed. But if free the abstention period is extended again, is this advice still valid given the possibility of a student loan forgiveness?
Finding the best way to tackle the country’s growing student debt balance has been a matter of division for a few years, but a recent survey by Vox and Data for Progress found that a majority of voters now support forgetting at least some of the student loan debt. As such, various versions of debt relief have become a mainstay of Democratic party platforms: President-elect Joe Biden campaigned on the issue and said he supported forgive $ 10,000 in federal student loans as part of a COVID-19 relief program. Meanwhile, Senators Chuck Schumer and Elizabeth Warren want the new president erase $ 50,000 from loans held by the federal government and the private sector by decree.
For the 42.3 million people with federal student loans, this could be a once in a lifetime opportunity. Under normal circumstances, even if universal debt cancellation were a possibility – as it appears to be now – borrowers would have to keep making payments until cancellation is a certainty, or else they risk losing money. fall into delinquency and see their balances increase as interest accrues. If forgiveness proposals were to fail, then they should have more.
But these are not normal circumstances: current borrowers have been released from their obligation to make payments without incurring penalties. This gives them a period of time in which they can essentially wait and see if forgiveness occurs – and if it does, they could be rewarded by forgiving more of their debt.
So, if you have paid off your principal on your loans during this time, it might be tempting to stop now and wait until your debt is just cleared. But as usual, your best option really depends on your unique situation.
“There is no one-size-fits-all solution to how we advise people with student loans due to the complexity of things,” says Scott Snider, Certified Financial Planner and Partner at Paragon Wealth Strategies in Jacksonville, Fla. .
The average student loan borrower has about $ 37,500 in debt, with 15 million people who must less than $ 10,000. For those with a lower debt burden, wiping out $ 10,000 or even $ 50,000 would wipe out most, if not all, of their remaining money. If your debt is near or below average then taking advantage of the current free forbearance period and crossing your fingers in the hope of getting at least some debt relief is probably not that risky, according to experts.
“It doesn’t cost you anything to wait. Until it starts costing you money, I’ll wait and see what happens, ”Snider says.
But not everyone has an “average” amount of student debt. Millions of federal borrowers, in particular those who attended higher school for professional degrees like medicine and law, the student loan burden is in the order of six digits. If you’re in that boat, setting aside $ 10,000 or even $ 50,000 will still give you years of money back. Under these circumstances, Snider says your best plan is to continue paying as much as you can during the zero interest period: “I would make as much progress as you can right now.”
There are still a lot of details that we do not yet know about the widespread loan cancellation, including whether or not it would cover private student loans. But the current forbearance period did not apply to private loans, which make up 7.9% of all unpaid student loan debt, which means they still accrue interest. So while you may feel very optimistic about the possibility of widespread student debt relief, it is important to continue paying as you normally would if these were private loans.
Finally, before making any changes to your current student debt repayment plan, you should do an honest assessment of your situation. For some, it might be wiser to take advantage of the continuous forbearance period without penalty by allocating that part of your income to a emergency fund, while others will want to repay as much principal as possible while paying no interest. Ultimately, we won’t know if widespread forgiveness is unfolding until it actually happens.
“If borrowers get $ 10,000 or even $ 50,000 wiped out, that’s great,” Snider says. “But until then, we are proceeding as we did.”