If you’re a college student wondering about how the new loan forgiveness plan announced by President Biden affects you, keep reading below. This article will go through the main points of the program and offer tips on how to budget your finances.
The Public Student Loan Forgiveness program gives 45 million Americans with federal student loans some wiggle room. But it’s still a good idea to resume or continue making payments anyway. If it fits your budget, it’s an excellent way to pay down your loan while no interest is accrued.
Average Student Loan Amount
Keep in mind that Biden has provided $10,000 in debt forgiveness — and only for borrowers making less than $125,000. (Students receiving a Pell grant will have $20,000 of their loan erased.) The average student loan debt is about $37,000, and some 2.1 million Americans owe more than $100,000.
Loan Payment Strategy
Even though student loan payments have been paused for over two years, you still owe the remaining balance. And interest will start accruing again when the pause ends.
Any financial resources you can allocate toward your student loans during the pause will reduce your debt, saving you money in the long term.
It’s more productive to think about this as a payment freeze — like an extended intro 0% APR period on a credit card. Free financing means that all your payments will go directly toward paying the principal, decreasing the interest you’ll pay once the pause is lifted.
Income-Driven Repayment Plan (IDR)
Income-driven repayment plans allow you to make payments based on your salary. After a certain time period, usually 20 to 25 years, your loan balance is forgiven. If you were on an IDR plan before the pause, you’ll receive credit toward IDR forgiveness for each month of the pause.
If your ultimate goal is loan forgiveness through the Public Service Loan Forgiveness or Teacher Loan Forgiveness programs, all months of the student loan freeze will also count toward your payments required for federal loan relief. If this is your situation, there’s not much upside in making payments during this time.
One Final Freeze
The CARES act in March 2020 was the federal government’s first pause on student loan payments. President Donald Trump and the Department of Education extended the deadline twice and Biden has postponed it five times since taking office.
Biden said he would extend the pause “one final time” to Dec. 31 of this year. So another extension is unlikely and the administration has said borrowers should prepare to start making payments in January 2023.
Plan Ahead
Now that you have more information about the Public Student Loan Forgiveness program, it’s time to plan ahead. The Federal Loan Simulator is a great tool to determine how much you should pay each month. It takes into account your income, loan amount, and other factors.
