As we come to the end of 2022, most federal student loan borrowers should have two objectives:
- Second, it is time to prepare for the January 1, 2023, repayment restart. Even though there have been numerous extensions to the payment and interest pause, another one would be a shock.
For private loan borrowers, it is all about the interest rates. If you have a variable-rate private loan, it is a ticking timebomb. Interest rates across the economy are climbing, and variable-rate loan interest rates will continue to grow. If possible, using a refinance to lock in a fixed-rate loan is probably the best option. This route can also lower monthly payments.
Tip #1: Try to Maximize Biden Loan Forgiveness
For many borrowers, no action will be necessary to get the $10,000 or $20,000 of loan forgiveness recently announced by President Biden.
However, action will be required on the part of some borrowers. Some people may have to submit an application. Others can maximize their forgiveness by asking for a refund on previous payments.
Be sure to check out the full article on maximizing the new forgiveness program.
Tip #2: Keep an Eye on Servicer Transfers
If it has been a while since you last looked at your federal student loans, they may be with a new servicer. A couple of months ago, my student loans moved from FedLoan Servicing to Mohela.
I’ve previously written a guide to dealing with loan servicer changes, but here is the short version:
- Watch out for scams. A confusing transition time makes it easy for scammers to take advantage of unsuspecting borrowers. Keep your guard up.
- Back up your records. Download or print all of your billing statements and payment records. Ideally, this information should go from one servicer to the next, but it is far from a certainty.
- Update your contact information. If you miss a payment because your old servicer sent a letter or email to your old address, they won’t cut you any slack. Updating your info might seem like you are doing them a favor, but you are only helping yourself.
Sherpa Thought: I can’t emphasize the importance of updating your contact information enough.
Many borrowers have old email addresses or mailing addresses on file from before the pandemic. Some date back to where they lived during college.
The loan servicers do not cut borrowers any slack if they miss a payment because the bill was sent to an old address.
Tip #3: Don’t Make Federal Student Loan Payments Right Now
Some borrowers and finance experts suggest that the 0% interest is an opportunity to knock out student loan debt. The idea is that borrowers who can afford to make payments continue to make payments. At the end of the interest freeze, these borrowers will have significantly reduced balances.
While I see the merits of this approach, I think there is a better way of doing it. Rather than giving the money to the government, borrowers should use the opportunity to build up their emergency fund. Ideally, all student loan borrowers should have an emergency fund. The interest freeze provides a chance to make sure sufficient funds are available. Any planned federal student loan payments belong in this fund.
At the end of the interest freeze, borrowers can make one large payment on their student loans. If things go as planned, the result will be the same as if they continued making monthly payments.
However, there are two significant advantages to delaying the payments until the very end:
- Borrowers can earn interest on their money. This is the rare instance where a high-yield savings account will pay a higher interest rate than what a student loan charges. By being patient, borrowers can earn some money,
- Borrowers get flexibility. This is the big one. If you lose your job or get sick and face substantial medical bills, you will be glad you kept the money.
The one exception to this suggestion would be the borrowers who don’t think they have the self-control for this strategy. If making regular monthly payments seems easy, but you fear you wouldn’t send in the large payment at the end, stick with making regular payments.
Tip #4: Don’t Wait Until 2023 to Call Your Servicer With Questions
Are you confused about what repayment plan to select? Do you have questions about forgiveness eligibility?
Now is the time to call your federal servicer to resolve these questions. In January, things are going to be a mess. Servicers expect to get more calls in January than what they normally receive in a year.
Warning: Even though it is better to call now than it is to wait, borrowers should still expect long hold times. I’ve heard from many people who had to spend hours on hold.
The long waits right now are brutal, but in January, things are only going to get worse.
Tip #5: Ask for a Refund on Your Previous Federal Payments
This tip is a continuation of the previous one.
If you made unrequired payments during the interest freeze, you might be able to get a refund for that payment.
Getting a refund only to return the money in a couple of months may seem like a waste of time. For many borrowers, it would be a waste of time.
However, having extra money in reserve, even if only for a short period, could be significant. If you are a couple of bad breaks from dire financial circumstances, getting a refund is worth the effort.
Lastly, for some borrowers, getting a refund on previous payments can mean more forgiveness under the Biden one-time forgiveness policy.
Tip #6: Consolidate your FFEL Loans
FFEL loans are a pain. Qualifying for forgiveness is tricky, and repayment plan options are limited.
However, many borrowers were stuck with their FFEL loans because consolidating them into a federal direct loan meant restarting the forgiveness clock.
In a pleasant surprise for borrowers, a new but temporary program from the Department of Education now allows FFEL borrowers to consolidate without losing their progress towards IDR forgiveness.
Because the rule is temporary, sooner rather than later should be the goal for many FFEL borrowers.
Tip #7: Now is a Great Time to Refinance Private Student Loans
For over a year, I’ve been telling borrowers not to refinance their federal loans. The big benefit of refinancing is getting lower interest rates, and no refinance company can beat the 0% offered on federally-held student loans.
The refinance companies have been feeling the pressure. With fewer borrowers looking to refinance their loans, competition has gotten intense. As a result, interest rate offerings have been very aggressive, which means lower rates and better loan terms for borrowers.
However, inflation has become an issue as most lenders have raised rates. Fortunately, rates haven’t jumped like mortgages. The changing environment rewards the borrowers who shop around.
I know that many borrowers like to opt for shorter-term loans with lower interest rates, but if I had to refinance my private loans right now, I’d select a 20-year fixed-rate loan.
Here again, I tend to be conservative and prefer flexibility. A longer loan means a slightly higher interest rate but much lower minimum monthly payments. However, borrowers can always pay more than the minimum required. The benefit of a low minimum is the protection it offers in lean months.
As of November 2022, the following lenders offer the lowest rates on 20-year fixed-rate loans:
