3 ways to reduce student loan debt before Biden's payments freeze ends
Americans who were worried about federal student loan payments resuming in October stopped sweating after President Joe Biden's administration decided to extend the freeze on payments and interest for an additional four months.
That means the roughly 42 million federal student loan borrowers are off the hook until Jan. 30, 2022. Biden's Department of Education warned that this was the "final extension" of a pause on student debt that's been in place since March 2020.
If you have student loans and your finances have held up pretty well during the pandemic, take advantage of these last months of the moratorium to clear out as much of that debt as you can.
Here are three ways to help you try to reduce your student loan debt before payments restart.
1. Make payments, even though you don't have to
While it might be tempting to remain "on break" from your student loans until February, continuing your regular payments — and even paying more than your usual minimum — is a smart idea, if you can afford it.
Since the interest rates on federal student loans are frozen at 0%, any payments you make now will go entirely toward the principal of your loan.
That means you might be able to take a decent chunk out of your loan balance. When student loan debt was frozen last year, the typical balance was $20,000 to $24,999, according to Federal Reserve data.
Resuming your payments early is probably out of the question if you're dealing with other debts, like if you ran up your credit cards during a period of unemployment last year. U.S. Education Secretary Miguel Cardona mentioned in an interview last week that officials are hoping to find other ways to ease the burden on student loan borrowers, but in the meantime, you may want to use this time to tame those debts with the help of a lower-interest debt consolidation loan.
2. Seek a new repayment plan
You could clear your student loan debt faster by switching up your current payment plan, particularly if the pandemic cut your income and it still hasn't come back.
The government offers income-driven repayment plans that allow borrowers to make more affordable payments, based on what they earn. After you make 20 or 25 years of regular payments under an income-driven plan, your remaining debt will be forgiven.
That might be your best shot at having some of your student loans canceled. President Biden campaigned on wiping out $10,000 in student debt per borrower, and leading Democrats are pressing him to go to $50,000 — but there are questions now over whether Biden has the authority to forgive massive student debt.
One simple money-saving step with a federal student loan is to enroll in autopay because signing up for automatic deposits will qualify you for a 0.25% interest rate reduction when payments resume.
3. Refinance private loans
If your student loans are from a private lender and not the federal government, the longer payments pause doesn't apply to you. But you can attack your student debt over the next few months by refinancing your loan because interest rates on refi student loans from private lenders have been at historically low levels.
Whether you qualify for refinancing will largely depend on your credit score and your current income. If you’re not sure about your score, it's easy to check your credit score for free online.
Even if you’ve lost your job due to the pandemic, you may be eligible for a refi if you can show investment income or earnings from a side gig, or find a co-signer to back your application. To get the best rate to refinance a student loan, you'll need to shop around and compare quotes from multiple lenders.
Just remember that refinancing is not an option if you’ve got a federal student loan, and replacing a federal loan with a private one will make you ineligible for any further loan relief measures from the government.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.