It’s been an eventful year in the world of student loans. The pandemic and the subsequent CARES Act provided the means for federal student loan payments — and the interest charged on them — to be suspended through the end of 2020.
After President Joe Biden took office, he used an executive order to extend federal student loan forbearance through the end of September 2021. With these changes, along with various proposals related to dealing with growing student loan balances, many borrowers are wondering how they should best manage their federal student loan debt.
Will there be student loan forgiveness?
One of the biggest issues on the table right now is blanket student loan cancelation. While there are various student loan forgiveness programs in place at the federal and state levels, those often come with several specific requirements.
Congressional Democrats are interested in student loan cancelation of up to $50,000 for borrowers and are pressing Biden to issue an executive order for that amount. Biden, on the other hand, is resisting calls for that large amount of forgiveness and has instead signaled that he’s more open to canceling $10,000 in student loans.
Instead of canceling $50,000 by executive order, Biden would like to see Congress enact such a large amount. Additionally, to forgive such a large amount of student debt, borrowers may have to meet a few criteria. A few examples may include the borrower’s income and the school they attended. For example, some proposals have included income caps for forgiveness, or only include public universities and community colleges while excluding private institutions.
Another concern is the fact that most forgiven balances are considered taxable income by the IRS. Some types of forgiveness, like Public Service Loan Forgiveness (PSLF), aren’t taxable, but that’s because Congress wrote the law creating PSLF that way. The Constitution puts taxation under Congress’s purview, so while Biden might be able to cancel $50,000 in student loan debt, he couldn’t change the resulting tax consequences.
Update 3/11/2021: As part of the $1.9 trillion federal stimulus package signed into law on Thursday, March 11, student loan forgiveness is now tax-free due to a provision included within the bill.
Should I pay down student loans during forbearance?
Another major question that federal student loan borrowers may be asking is whether they should continue to pay down their federal student loan debt balance during the administrative forbearance period lasting until September 31, 2021. Deciding whether to continue paying down student loan debt during the extended administrative forbearance period depends on your situation and financial goals.
On one hand, with interest suspended during this time, federal student loan payments are being attributed to principal. As a result, continuing to make payments could mean paying off your federal student loans more quickly, which may benefit you in the long run.
However, if you have other debt, especially if it’s higher interest debt like credit card debt, it might make more sense to take what you would have put toward student loan payments and instead pay down the other balances. High interest balances can cost you more in the long run, so tackling them and improving your overall financial position might be the right move.
Carefully consider how this type of relief could benefit you. Review your situation and your goals, crunch the numbers and then decide what is likely to work best for you.
Should I refinance private or federal student loans?
Another consideration is that student loan refinancing rates are currently at historical lows. As a result, if you have good credit and qualify for refinancing, you could get a much lower interest rate and pay off your student loans faster.
Before you refinance your federal loans, though, remember that student loan refinancing means giving up access to federal benefits like PSLF and income-driven repayment plans. Additionally, administrative forbearance doesn’t apply to private student loans, so when you refinance, your payments will resume and interest will accrue.
If you’re on the fence, remember that you may still be able to enjoy the benefits of refinancing your private student loans, even without refinancing your federal loans. Take the time to research private student lenders to see if this option may be right for you.
Some student loan cancellation proposals include both private and federal loans, while others only include federal loans. Depending on the size of your student loan debt, it may make sense to partially refinance your federal student loans. You can still leave a portion of the balance out in case federal student loan forgiveness does become available.
Carefully think about what you think is likely to happen, and then decide what’s likely to work best for you.
Conclusion
Choosing the best way to manage student loan debt can feel like a daunting task, but doing your research can help. Pay attention to current events so you can make the best choice for your current financial situation.
If you’re interested in refinancing your student loans, contact ELFI’s Customer Care team to learn more. You can also use ELFI’s Get My Rate tool to see what type of interest rate you may be eligible for without impacting your credit score.
