By Claire Ballentine
Confused about whether your student loans will be forgiven? Everyone is.
It’s been a tumultuous year for those with federal student loan debt: An announcement from President Joe Biden about a program to forgive up to $20,000 in debt was met with cheers in August. Then, a federal judge in Texas struck it down in November, and now the Supreme Court will take up the case early in 2023.
For those trying to plan their financial futures, the back and forth is a giant headache. Forgiveness could be life-changing for those struggling under mountains of debt, but it’s difficult to make concrete decisions amid the uncertainty. Some borrowers are losing hope altogether.
Plus, the planned resumption of monthly payments in 2023 — which have been on pause for almost three years following the onset of the pandemic — could significantly affect those already dealing with inflation and a weakening economy.
Although much remains unknown, financial advisors have some strategies to how prepare.
Know the Details
After not being required to make monthly payments for so long, borrowers may have forgotten — or purposely ignored — the details of their debt. Now is the time to refamiliarize yourself with it, said Brittany Brinckerhoff, financial adviser at Hilltop Wealth Advisors in North Carolina.
She recommends borrowers figure out which loan servicer they now have — it might have changed during the pandemic — and whether their contact information is up to date. Plus, it’s smart to know the interest rate on your loans and how much the monthly payments might be in 2023.
For those who had payments on autopay, check to make sure the bank account information is still correct and on file.
“You likely don’t need to take any actions on the loans quite yet,” Brinckerhoff said. “Just compile your information and make sure your servicer knows how to reach you.”
During the pandemic pause, financial experts have recommended not making payments, since Biden’s forgiveness plan was so unclear and the debt wasn’t accruing interest. That advice still applies, but it’s important to set money aside for when payments resume.
Try paying yourself each month and putting that cash into a high-yield savings account, recommends Kyle Hill, owner of Hill-Top Financial Planning in Kansas City, Missouri. Goldman Sachs Group Inc.’s consumer bank Marcus and competitor Barclays Plc are both currently offering a 3% annual percentage yield.
“Practice getting in the habit of making those payments again,” he said. “Set this money aside in a separate account and don’t touch it unless it’s an absolute emergency.”
That way, if Biden’s forgiveness plan falls through and required payments resume, there’s cash ready to go. And if loans are forgiven, borrowers will have improved their savings, helpful in case of a recession in 2023.
If the courts rule against forgiveness, you could even pay off your loans that day if you had enough saved up, said Jay Zigmont, founder of Childfree Wealth in Mississippi.
There are some cases in which paying off student loans now could be a good idea.
“If someone thinks they’ll be tempted to spend any extra cash they have sitting in their bank account, that might be one scenario where it makes sense to pay off the loans earlier,” Brinckerhoff said.
For those who hate the psychological burden of debt hanging over them, making payments may also be worth it for the reduced stress.
And, of course, anyone who has private student loans that are still gathering interest should try to pay them down as quickly as possible, said Noah Damsky, a financial planner at Marina Wealth Advisors in Los Angeles.
It may also help to pay off your student loans if you’re planning to apply for a mortgage, since having debt can negatively affect credit scores.
“Mortgage lenders will evaluate a borrower’s debt-to-income ratio and credit score, so paying off student loan debt could lower the debt-to-income ratio and usually increase the credit score,” Damsky said.
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