Should You Pay Your Student Loans in 2021?

There have been some major changes to student loans in the past year. With the COVID-19 pandemic still raging and the Biden administration taking office, these changes can certainly feel overwhelming.

Federal loans? Private loans? Forbearance? Interest? Student loan cancellation?

Uh, what?!

Your money is nothing to mess around with and being confused about your student loans could be costing you plenty.

So what should you do about it?

What is going on?

With 2020 behind us, it's best to focus on what lies ahead in 2021:

1. As it stands, you are not required to pay your federal student loans until after Sept. 30, 2021. This is referred to as "federal student loan forbearance". On his first day in office, President Biden signed an executive order to extend the forbearance period past the then-current deadline (Jan. 31, 2021).
2. During this time, you will not accrue interest. Your loans are essentially on pause. You will still owe every dollar, but not right now and no dollars are being added.
3. This forbearance period has absolutely nothing to do with student loan cancellation or forgiveness (more on that later).
4. If you are on an income-based repayment plan (i.e. PSLF, PAYE, REPAYE, etc.), your nonpayments will continue to count towards your total payment number (again, more on this to come).

What are the factors to consider?

1. Types of Loans: The only loans that apply to this situation are federal loans. As the name suggests, these are loans issued by the federal government. Private loans do not apply. Some of the larger federal loan servicers are:
   • FedLoan Servicing
   • Great Lakes
   • Navient
   • Nelnet
     
     
2. Your Situation: Ask yourself the following questions:
   • Can you afford to pay your monthly student loan payments (even if you are not required to)?
   • If you do not pay your student loans, what are you going to do with that money?
   • How much federal student loan debt do you have outstanding?
   • Are you on an income-based repayment plan?

What should you do?

Now that we have laid out all the facts, what should you do with this information?

1. You are on an income-based repayment plan:
   • In general, you probably should not pay anything during this forbearance period if you are on an income-based repayment plan.
   • All of your nonpayments during this time will count towards your total payment requirement. For example, let’s say that you are required to make 120 total monthly payments (10 years) over the life of the loan to qualify for PSLF. All of the months from now until October will count towards the 120 total.
   • There are a few minor nuances to this thought process (such as your income, taxes upon forgiveness, and employment status). Do your research and/or seek out a financial professional to guide you through this.
     
     
2. You can afford to pay your loans but are not sure if you should:
   • One advantage of paying your loans during this period is that every dollar reduce your principal balance (no interest). The compound effect of paying down that balance can be substantial in terms of savings on interest. This should not be taken lightly. For example:
     • A $100,000 loan with an interest rate of 5% paid monthly over ten years will cost you about $27,279 in interest.
     • Conversely, a $90,000 loan with the same 5% interest rate and term, will cost you about $24,550 in interest (saving you roughly $2,729).
       
       
3. You have less than $10,000 remaining on your loans:
   • Ok, so this is where speculation and a bit of guesswork comes into play. There is a decent amount of talk that the Biden administration will attempt to cancel $10,000 (or more) of student loan debt.
   • If you are in this camp, you may want to sit tight and see what happens.
     
     
4. You have decided not to pay your loans during this period:
   • Now you have to decide what to do with the money you are not putting towards your loans. This is going to be different for everyone based on your financial circumstances, but we can apply a few general rules of thumb:
     • If you do not have a cash emergency fund, build that up. Saving somewhere in the neighborhood of 3-6 months of fixed expenses in cash is a good place to start for most people. This will prepare you for unexpected expenses in the future (i.e. a car repair or medical bill).
     • Speaking of cash, you probably are not going to want to invest or spend the money you are saving during this period. Having a lump sum of cash at the end of this forbearance period gives you some serious leverage. At that point, you can make an educated decision with all available information (i.e. information on loan cancellation). You could opt to pay down a huge chunk of your loans (again, with no interest) or choose to invest at that point in time.

Summary

In summary, there are three things to consider:

1. Are your loans federal or private?
2. What is your current financial situation (i.e. ability to pay, outstanding loan balance, cash savings, etc.)?
3. Are you on an income-based repayment plan?

Once you do an honest assessment of these items, you can use this article to guide you through the decision-making process.

 

Taylor Venanzi, CFP provides advisory services through Activate Wealth, LLC, a registered investment adviser providing advisory services in Pennsylvania and in other jurisdictions where exempted. All written content by Taylor Venanzi, CFP on this site is for information purposes only and shall not be directly or indirectly interpreted as a solicitation of investment advisory services.