Why You Should Keep Paying Student Loans during the Pause
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- The Biden administration has extended into 2023 the student loan repayment freeze.
- Although you do not have to pay any loans during the pause period, this will save you some money.
- Student loan forgiveness is not guaranteed and student loan forgiveness can be challenged in court. You must make a plan for repayment.
Due to the court case against the Biden administration’s student-loan forgiveness plan, the government will extend the repayment pause in effect since March 2020. For many borrowers, it would be a smart move to continue making payments.
Biden’s plan to forgive $10,000 student loan debts for single borrowers earning $125,000 and less for married couples or heads of households making less than $250,000. Pell Grant recipients will get $20,000 of forgiveness. The latest pause may mean that you don’t need to pay until August 2023. However, you can still make payments on balances above the forgiveness amount while you wait. This could save you lots of money.
Jay Zigmont (a CFP) stated, “Student loans should be paid down. But, consider delaying that $10,000 or $20,000 until the court cases are resolved.”® Childfree Wealth founder and professional. The benefit of paying off your loans early is that all payments will go to the principal. Consider putting your $10,000 remaining in loans into a savings account. Once we get a decision on forgiveness, you can use the money to pay off the loan or save it.
According to the Department of Education, student loan payments will resume 60 days after the lawsuits are settled. If they have not been resolved by June 30, then it will be suspended for 60 days.
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Why should I pay student loans now?
You are typically paying principal and interest when you make loan payments. Borrowers who don’t make timely payments may find their loan balances rise because they only pay a portion of the interest, and not any principal.
You can make student loan repayments during the pause and all proceeds will be used to reduce the principal. Because you will be paying less interest when your regular payments resume, this will allow you to reduce your debt faster than if you were in a regular repayment term. This means that you will pay less interest than if there were no payments.
Student loan repayment example
Imagine that your initial loan balance was $30,000. This is how much you could save if you continued to make student loan payments over the course of the repayment pause.
For savings purposes, we use a fixed rate of 5% plus the average student loan debt. This amounts to a $318 monthly payment. Simpler calculations will show that we assume a three year repayment pause, which would bring us to March 2023.
You could have saved more $3,000 over the loan’s life if you made your monthly payments as usual for those three years.
Here’s an example to show you how much you could save between now and August 31st if you don’t make payments.
Although it may not seem like much, $781 is significant savings if student loan payments can be refinanced into your budget.
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Zigmont stated that student loan payments will be difficult when they start again. Start now with $50 to $100 monthly student loan payments. By increasing your monthly payments, you can not only save money but also help your loan repayments.