Ed Zurndorfer goes over the Student Loan Repayments that Resume on October 1, 2021
There are many federal employees who graduated from colleges and universities within the last 5 to 10 years and have student loans they are currently paying back. There are also federal employees who have children who graduated from colleges and universities within the last few years and these children have started paying off their student loans.
Student loan balances have effectively been frozen for the past 14 months, with no repayments required on federal student loans since March 2020. At that time, Congress first authorized the suspension of federal student loan repayment as part of one of its first major COVID-19 relief packages. During this time, interest on these loans has stopped accruing, thereby saving the average student loan borrower about $2,000 in interest expense during the first year of repayment. Also, collections on student loan defaulted debt have been on hold.
The suspension of student loan repayments and collections was initially set to remain in place for seven months but has been extended by both the Trump and Biden administrations. It is unlikely to be extended again due to the fact the economy is improving immensely.
Many experts, therefore, expect the loan repayment suspension will end Sept. 30, 2021, with loan repayments to resume Oct. 1, 2021. This column presents some tasks that current student loan borrowers who are due to resume or start their repayments should perform in preparation for the resumption of their student loan payments, starting Oct 1, 2021.
Make a complete evaluation of the loan(s) they own and the amount they owe on each loan.
A student loan borrower may not know the amount of student loans they have and what they owe because they have not made any student loan repayments in over a year. Even recent college graduates also need this information because after a six-month grace period, they will be required to start making regular payments. The six-month grace period ends in November or December 2021. The Federal Student Aid website at www.studentaid.gov shows how much they have borrowed and estimates what student loan repayments will be. Recent graduates who have private loans should also contact those lenders to determine payments and repayment options. Some private lenders will decrease the interest rate on these loans for those borrowers who enroll in auto debit payments.
Optimize repayment options.
Those borrowers who have federal student loans can use the Loan Simulator tool, available at www.studentaid.gov, to estimate what their payments will be under different repayment options. Recent graduates who will shortly start making federal loan repayments should think about household budgets and their repayment goals. For example, is their goal to lower their monthly repayments and thereby repay their loans over a longer time period and pay more total interest? Or do they want to repay their loans off in a shorter period of time, paying less total interest but paying a higher monthly payment? Another possible repayment program is “income-driven” In which payments made are based on income and family size.
Refinancing with a private lender.
What about the refinancing of one’s federal student loans with a private lender at a lower overall interest rate? Most federal student loan borrowers have loans with interest rates exceeding five percent, and in some cases exceeding eight percent. If they can afford it, and assuming they have a good credit rating, they may want to consider refinancing with a private lender at a lower interest rate.
However, there is a downside to refinancing with a private lender. Switching one’s federal student loans to a private lender could make the borrower ineligible for possible broad-based government-sponsored loan forgiveness that has been widely discussed in Washington. But as discussed below, this is unlikely to happen.
Moreover, refinancing one’s student loans with a private lender has to make sense mathematically, saving the borrower interest over the long term. Another factor is that one does not have to refinance all of their federal student loans. For example, an individual may want to refinance only those student loans that have high-interest rates.
The one thing that federal student loan borrowers should not rely on at this time (likely not to occur) is broad-based loan forgiveness from the federal government. If by some chance it does happen, federal student borrowers can re-strategize their repayment options at that time.
President Biden has resisted pressure for student loan debt cancellation, although he said he would support a move in Congress to cancel a maximum of $10,000 of federal student loan per borrower.
Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While the employees of Serving Those Who Serve are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.