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January 13, 2022

4 strategies for managing student loan debt

4 strategies for managing student loan debt

It’s Financial Wellness Month, and if your new year’s resolution was to get your personal finances in order, we’re here to help. In this series, we’re tackling the most common topics our Certified Financial Planner™ professionals get from Origin members. Today, we’re exploring student loan debt. You can catch up on our series by reading our first installment about investments

Student loan debt has been the subject of hot debate during the COVID-19 pandemic. Even though Congress passed a student loan relief bill to pause payments temporarily, people still have lingering questions, such as: 

How long will the pause on student repayments last?

Will there be a student loan forgiveness bill to follow?

Is there anything I can do now to get ahead of my debt? 

In this post, we’ll explore all these questions and share recommendations for what you can do to manage your student loan debt during this period of uncertainty.

What is the current state of student loan debt? 

In December 2021, President Joe Biden announced that he would extend student loan relief for another 90 days. The payments, which were initially set to restart on February 1, 2022, will now be paused through May 1, 2022. What exactly does this mean for student loan borrowers? It means that, until the deadline, they: 

  • Won’t have to make any federal student loan payments.
  • Won’t accrue any interest on their federal student loans.
  • Won’t be subjected to garnishments of their wages, tax refunds, and Social Security checks.

It’s important to note that this relief only applies to federal student loans—not private loans. Unfortunately, borrowers in the latter category have to follow the guidelines issued by their private lenders. For this reason, all the strategies outlined below will be specifically for federal student loan borrowers. 

Student loan debt forgiveness

4 strategies to manage student loan debt 

There are a lot of conversations about the likelihood of a student loan forgiveness bill being passed. While there’s a lot of enthusiasm for this type of action—with more than 60% of Americans saying they’re in support of debt forgiveness—we don’t recommend counting on it.

Instead, people should use this period of paused payments to take action to find better ways to manage their student loans. Here are 4 strategies we recommend looking into: 

1. Consider other loan forgiveness options

While you can’t reliably count on student loan forgiveness from the government level, there are other options for loan forgiveness that you can consider: 

Public Service Loan Forgiveness Program

The Public Service Loan Forgiveness program (PSLF) is a government initiative that forgives borrowers’ remaining federal student loan debt after they work full-time in public service roles—such as teaching, firefighting, and military service—and make 120 qualifying payments.

Recently, the Department of Education announced a limited waiver to PSLF that allows a broader range of loans to be eligible. The waiver also allows military members with federal student loans to have any time spent in active duty count toward PSLF—regardless of whether payments were made during that time. Learn more and apply here

Income-driven repayment plans 

You can also consider an income-driven repayment plan, which caps your monthly federal student loan payment at 10% to 20% of your monthly income. After 20 to 25 years of payments, the remainder of your remaining student loan balance is forgiven. There are 4 types of income-driven repayment plans that you can choose from. Learn more and apply here

2. Make optional student loan payments

If you have the financial capacity to do so, you may want to consider making optional student loan payments during the relief period. Why would you do this when payments aren’t required?

Since there’s no new interest accrual on your student loans, that means every dollar you pay right now will go toward any existing student loan interest. Once you pay off the interest, every payment you make after that will directly reduce your student loan principal balance.

3. Explore refinancing

If you have a loan with a high-interest rate (anything above 5%), you may want to consider refinancing. Since we’re currently in a low-interest-rate environment, now is a good time to potentially refinance your student loans. 

But keep in mind that the process of refinancing turns your federal debts into private debts. This means that your loan will no longer qualify for student loan relief—and therefore the 0% interest rates. If President Biden ends up significantly extending the forbearance period, it could be better to wait instead of refinancing. 

On the other hand, if your loan amount is big enough, it may be worth shopping around now to lock in a lower rate—rather than waiting and potentially having interest rates jump back up to a higher rate once student loan relief is over. 

4. Redirect your payments to savings 

Another option is to redirect your payments into savings—or even pay off other urgent debts. 

For example, you can use this time to pay off your credit cards, which tend to have high-interest rates. Or you can use the money to pay off any existing tax debts. Similarly, you can choose to build up your emergency savings or invest your money in a stable fund.

Everyone’s student loan situations are different. So, if you have access to a financial professional, we highly encourage you to consult with them about what the best option is for you. If you don’t, tell your employer about Origin. We provide employees with direct access to Certified Financial Planners for personalized guidance. 

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Heather Comella, CFP®
Lead Financial Planner