With the passage of the debt ceiling bill, we now know that federal student loan repayments will resume on August 30.
It’s a tough way to end the summer for borrowers, but debt ceiling negotiations could have gone much worse.
Most of this month’s tips are aimed at helping everyone prepare for the reboot.
Although immediate action is not required for most borrowers at this time, it is a great time to take advantage of some of the opportunities currently available.
Federal borrowers can use the remaining pause and possible future forgiveness to maximize the debt that will eventually be written off.
For private borrowers, it all depends on interest rates. If you have a variable rate private loan, it’s a ticking time bomb. Interest rates are rising across the economy and variable rate loan interest rates will continue to rise. If possible, using a refinance to lock in a fixed rate loan is probably the best option. This route can also reduce monthly payments.
Tip #1: Keep an eye on service transfers
If it’s been a while since you last reviewed your federal student loans, they may be with a new servicer. Several months ago my student loans switched from FedLoan Servicing to Mohela.
I have already written a guide to dealing with loan servicer changesbut here is the short version:
- Beware of scams. A confusing transition time makes easy for scammers to take advantage of unsuspecting borrowers. Keep your guard up.
- Save your recordings. Download or print all your billing statements and payment statements. Ideally, this information should pass from one repairer to another, but this is far from a certainty.
- Update your contact information. If you miss a payment because your old repairer sent a letter or email to your old address, they won’t give you time. Updating your information may seem like you do them a favor, but you’re only helping yourself.
Sherpa Thought: I cannot stress enough the importance of updating your contact information.
Many borrowers have old email addresses or mailing addresses on file before the pandemic. Some date back to where they lived in college.
Loan officers don’t leave borrowers a margin if they miss a payment because the bill was sent to an old address.
Tip #2: Don’t Make Federal Student Loan Payments Right Away
Some borrowers and finance experts suggest that the 0% interest rate is an opportunity to eliminate student loan debt. The idea is that borrowers who can afford to make payments continue to make payments. When the interest freeze ends, these borrowers will have significantly reduced balances.
While I see the merits of this approach, I think there is a better way to do it. Rather than giving the money to the government, borrowers should take the opportunity to build up their emergency fund. Ideally, all student borrowers should have an emergency fund. Freezing interest ensures that sufficient funds are available. All scheduled federal student loan payments belong to this fund.
When the interest freeze ends, borrowers can make a large payment on their student loans. If things go as planned, the result will be the same as if they continued to make monthly payments.
However, there are two important advantages to delaying payments until the very end:
- Borrowers can earn interest on their money. This is the rare case where a high yield savings account will pay a higher interest rate than a student loan. By being patient, borrowers can earn money,
- Borrowers get flexibility. It’s the big one. If you lose your job or get sick and face major medical bills, you’ll be glad you kept the money.
The only exception to this suggestion would be borrowers who don’t think they have the self-control for this strategy. If making regular monthly payments seems easy, but you’re worried about not sending the big payment in the end, keep making regular payments.
Tip #3: Don’t wait until the frost is over to call your repair person with questions
Not sure which repayment plan to choose? Do you have questions about pardon eligibility?
Now is the time to call your Federal Servicer to resolve these issues. When payments resume, things are going to be a mess. Repairers expect to receive more calls in the first month than they normally receive in a year.
Tip #4: Ask for a refund on your previous federal payments
This tip is a continuation of the previous one.
If you have made payments not required during the interest freeze, you may be able to get a refund for this payment.
Getting a refund only to return the money in a few months can seem like a waste of time. For many borrowers, this would be a waste of time.
However, having extra money in reserve, even if it is only for a short time, could be important. If you’re a couple bad breaks in a tough financial situation, getting a refund is worth the effort.
Finally, for some borrowers, getting a refund on previous payments may mean more forgiveness under Biden’s unique forgiveness policy.
Tip #5: Consolidate your FFEL Loans
FFEL loans are painful. Rebate eligibility is tricky and repayment plan options are limited.
However, many borrowers were stuck with their FFEL loans because consolidating them into a federal direct loan meant restarting the forgiveness clock.
In a pleasant surprise for borrowers, a new but temporary Ministry of Education program now allows FFEL borrowers to consolidate without losing their progress towards IDR remission.
Because the rule is temporary, sooner should be the goal for many FFEL borrowers.
Tip #6: Now is a great time to refinance private student loans
For over a year I have been telling borrowers not to refinance their federal loans. The great thing about refinancing is getting lower interest rates, and no refinancing company can beat the 0% offered on federally held student loans.
Refinancing companies have felt the pressure. With fewer borrowers looking to refinance their loans, the competition has become intense. As a result, the interest rate offers were very aggressive, which means lower rates and better loan terms for borrowers.
However, inflation became a problem as most lenders raised their rates. Fortunately, rates have not jumped like mortgages. The changing environment rewards borrowers who shop around.
I know many borrowers prefer to go for shorter term loans with lower interest rates, but if I were to refinance my private loans right now, I would choose a 20 year fixed rate loan.
Again, I tend to be conservative and favor flexibility. A longer loan means a slightly higher interest rate but much lower minimum monthly payments. However, borrowers can still pay more than the required minimum. The benefit of a low minimum is the protection it provides during lean months.
As of June 2023, the following lenders are offering the lowest rates on 20-year fixed rate loans: