22 July 2023
Bruce Helmer and Peg Webb
Late last month, the U.S. Supreme Court, in a 6-3 decision, struck down the Biden Administration’s plan to forgive up to $20,000 in federal student-loan debt each for qualified borrowers.
The majority of justices reasoned that the U.S. secretary of education did not have the authority to offer widespread debt cancellation. The Biden Administration immediately vowed to move forward with loan forgiveness under separate legal authorities.
As a first step, the administration said it would forgive $39 million in federal loans for more than 800,000 eligible borrowers enrolled in income-driven repayment plans such as Direct Loans or Federal Family Education Loans (Parent PLUS).
The administration said it is also on a parallel track to forgive federal student loans using a separate legal authority, the Higher Education Act of 1965. This law would give the secretary of education the authority to “compromise, waive, or release any right, title, claim, lien or demand” in federal loan provisions.
Both of these alternative approaches seem likely to take some time to be implemented, if not brought to the Supreme Court. In light of that uncertainty, today’s article discusses the steps borrowers need to take to begin paying back loans and presents some money-saving ideas for getting the process back on track.
What’s next for borrowers?
The Supreme Court’s decision follows a three-year pause in federal student loan repayments for millions of Americans that began in March 2020. If you have federal loans, interest will start accruing on Sept. 1, 2023, and the first payments are due in October, according to the U.S. Department of Education.
Given the high expected volume of calls to loan servicers, now is the time to get organized to restart your student loan payments. Begin by reviewing your loan balances, especially if you haven’t looked at them in the past three years. Make sure your Federal Student Aid account info is up to date (e.g., passwords and logins; make sure the lender has your correct address, phone, and email information). Double-check to see that your loan servicers have not changed since your last payment (you can get this info in your free credit report at annualcreditreport.com). Finally, you’ll want to verify the current interest rate on each loan, as well as their monthly amounts and due dates, and revisit your budget to make sure you can absorb monthly student-loan payments.
Some money-saving tips to consider
Loan repayment options under the Federal Student Aid programs generally fall into two options: standard repayment plans, generally with a10-year term, are good for borrowers who can more easily afford monthly payments, while income-driven repayment plans, with a term of 20 or 25 years, may be attractive to borrowers who need some level of debt relief. In the latter case, some options let you pay $0 per month but will cost you more in interest over the life of the loan. As a general rule, if your goal is to whittle down your total debt cost, keep the loan term as short as possible.
Some other strategies include the following:
• Check with your employer. In recent years, many companies have responded to their employees’ need to reduce student loan debt by offering student loan assistance through their benefits packages. Companies may provide one-time, tax-free lump sum payments or recurring payments, either to loan servicers or directly to employees. Keep in mind there are specialized loan-forgiveness options for special classes of borrowers, such as Public Service Loan Forgiveness and Teacher Loan Forgiveness.
• Sign up for autopay. Some lenders offer a 0.25% discount if you elect to do this. But take note: If you were already enrolled in autopay before the loan repayment program was paused, make sure with your loan servicer that you don’t need to manually sign up again.
• Look at ways to consolidate or refinance loans. Consolidation means you combine various loans into one so you can make one monthly payment. Generally, the rate you pay in a consolidated loan is the weighted average of previous rates rounded up to the nearest 1/8 of 1% — which seems a reasonable cost given the convenience of a single payment. Although it can take up to 30 years to repay a consolidated loan balance of $60,000 or more, we don’t typically recommend this, as interest payments can balloon the total amount borrowed.
If lowering your rate is important, refinancing may be the better option. Private loan terms range from 5 to 15 years, which can be a manageable amount of time to pay off your student debt. (Warning: refinancing turns public loans into private loans, removing your access to federal protections such as income-driven repayment and forgiveness programs.)
• Look at ways to make extra payments. There’s no penalty for paying off federal loans early. If you owe $10,000 at 5%, for example, over 10 years you’d pay $2,728 in interest charges. If you make extra payments to cut the term in half, you’d only pay $1,323 in interest. But be sure to instruct your loan servicer to apply extra payments to the principal, not interest.
The current administration’s efforts to bring federal student loan relief to millions of borrowers appear to be destined for more delays and legal challenges. Unless some extraordinary level of bipartisanship emerges in Congress to come up with a workable solution, student borrowers would do well to prepare for the resumption of loan payments this fall.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Wealth Enhancement Group does not offer tax or legal advice.
Bruce Helmer and Peg Webb are financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on WCCO 830 AM on Sunday mornings. Email Bruce and Peg at [email protected]. Securities offered through LPL Financial, member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, LLC, a registered investment adviser. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL Financial.