7 Questions to Ask Before You Stop Paying Your Student Loans in Forbearance

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Editor’s note: The Supreme Court struck down student loan forgiveness on June 30, 2023. After a three-year pause, federal student loan interest will resume Sept. 1 with payments starting in October.

The possibility of student loan forgiveness is no longer in question.

On Aug. 24, 2022, the Biden administration forgave $10,000 of student debt for all borrowers who make less than $125,000 per year ($250,000 per household), while forgiving $20,000 for borrowers who previously received the Pell Grant.

That news grabbed the most headlines, but the Department of Education also extended the administrative forbearance that freezes interest rates and payments for federally held student loans until Dec. 31, 2022. This was the seventh – and said to be final – such extension since the pandemic began in 2020.

So what does this mean if you’re still carrying student debt?

Depending on your loans and financial situation – and whether the $10,000 forgiveness wiped out your loans completely – you might actually be better off making larger payments right now… or none at all.

Don’t worry, we’ll explain.

Student loan balances have been canceled for more than 21 million borrowers, including defrauded students, some current and former service members, and other groups. See if you qualify.

7 Questions to Ask Before You Stop Paying Student Loans in Forbearance

Before you start celebrating that your student loans are going to disappear, let’s do a reality check and figure out how forgiveness might affect you and what steps you should take.

1. Should You Make Payments If You Have Both Federal and Private Student Loans?

If you have a mix of private and federally held student loans, your best strategy may be to use the money you’d normally pay toward your federal loans to pay off more of the private loans that are still actively accruing interest.

Not all student loans are eligible for forbearance — and it’s highly unlikely they will all be eligible for forgiveness.

Forbearance covers all loans owned by the U.S. Department of Education, which includes Direct Loans, subsidized and unsubsidized Stafford loans, Parent and Graduate Plus loans, consolidation loans and Defaulted FFEL Program loans.

If you have private student loans, these loans are not covered by the administrative forbearance period and there’s almost zero chance they’ll be wiped out by a mass forgiveness.

Here’s more advice on how to manage debt from private student loans.

2. How Could Your Balance Be Affected by Student Loan Forgiveness?

If you owe more than $10,000 in student loan debt, you should aggressively be saving additional money to chip away at the balance that remains after the forgiveness goes into effect and forbearance ends.

But that doesn’t necessarily mean you should be writing checks every month, for now. It might not earn you much in interest, but if you can put the amount that you plan to pay toward your student loan in a high-interest savings account, you can withdraw it as the forbearance deadline approaches and pay off as much as you can of your student loan principal.

If you have less than $10,000 in student loans and make less than $125,000 per year? Then congratulations. No more student debt for you!

3. What Should You Do if Your Loans Were in Default Before the Pandemic?

The latest forbearance extension included an important change for those borrowers who were in default when the pandemic began: The government will allow delinquent borrowers to re-enter repayment in good standing so they won’t have to anticipate collections activities resuming — including garnished wages and tax refunds — as the deadline approaches.

This is a big reprieve — but don’t wait it out. Reach out to your loan servicers now, particularly if your income has changed during the pandemic. Ask about income-driven repayments plans so you can be ready to resume payments when the forbearance period ends and avoid ending up in default again.

If you have a balance after $10,000 of your debt is wiped out, you still have some work to do. And since you previously had issues with making on-time payments, you should start planning now to knock out that remaining debt.

If you default on student loans again after forbearance ends, the loans can be sent to collections, and your wages, tax returns and Social Security benefits may be garnished up to 15% for repayment.

4. Should You Wait for Student Loan Forgiveness if You’re on the PSLF Track?

If you’re pursuing Public Service Loan Forgiveness — you have a direct loan, you’re on an eligible repayment plan and you work for a qualifying employer — then you can and should take advantage of the relief period by making no payments.

Those zero-dollar payments still count toward your total to earn forgiveness, and if your loans happen to be forgiven during this period, all the better. In fact, the Department of Education announced in January that up to 550,000 borrowers will see “accelerated forgiveness” of their loans.

But if you’ve lost your job or have had your hours cut to less than the 30-hour minimum, your non-payments will not count toward forgiveness (but you still don’t have to pay while in the forbearance period).

PSLF does not require consecutive payments, so you can still pause on payments if you think you’ll return to your non-profit or public sector job.

However, if you think it’s unlikely you’ll get eligible employment again, you may want to take advantage of the forbearance period to start paying on the loan. At the very least, you should update your income (if you’ve lost your job) on your income-driven repayment plan.

5. How Does Your Degree Affect Your Chances for Forgiveness?

If you have loans that you took out to get an advanced degree, don’t expect to benefit from any type of student loan forgiveness.

“People with advanced degrees are unlikely to get mass forgiveness, if any forgiveness, from the government because you’re seen as part of a society that has greater upward mobility,” said Steve Muszynski, the founder and CEO of Splash Financial, a student loan refinancing marketplace.

Graduate loans are also likely to have higher interest rates, which means the forbearance period is a good time to be putting a dent in that debt.

However, as with all federally held loans, you’re still likely better off holding onto them rather than refinancing into a private loan, according to Betsy Mayotte, president of The Institute of Student Loan Advisors, a non-profit organization that offers free student loan advice and dispute resolution assistance to borrowers.

Besides the income-driven repayment plans and forgiveness programs already out there, you’d lose out on this interest-free period.

“I’m running into a lot of people right now who are kicking themselves because in the last couple years they did refinance their federal loan into private,” she said. “They’re begging for a way to take it back, and you can’t.”

6. How Close Are You to Retirement?

If you’re nearing retirement and paying on student loans — whether it’s your own loans or those you took out to pay for your kids’ education — forgiveness may help you wipe out some of your loans. Focusing on saving as much as you can for retirement will only help you further during this forbearance period.

“Retirement should always come first as far as deciding where your money goes,” Mayotte said.

But solely relying on forgiveness is probably not the best strategy if you have more than $10,000 in loans or took out loans to get an advanced degree. In that case, you should start preparing for a future with a fixed income by aggressively paying off your student loan debt and looking into an income-driven repayment plan.

“Understand that you might be 80 years old when the loan is finally gone, but at least the payments are going to be affordable and [they’re] not going to change,” Mayotte said.

7. What Does the Rest of Your Financial Situation Look Like?

All of these strategies for getting the most bang for your buck may not mean much if you’re struggling to pay the bills. If you are in a situation where you need the money to pay for your basic needs, take advantage of the forbearance period to get yourself back on your feet and to start building an emergency fund.

4 Steps You Should Take Before Forbearance Ends

  1. Find out who your loan servicers are and how much you owe. Do it now — some servicers dropped out during the pandemic and you’ll want to make sure your lenders have your updated contact info. You can call the Federal Student Aid Information Center at (800) 433-3243 or check online at studentaid.gov.
  2. Determine if you can make the payments when they are set to resume. If not, sign up for an income-driven repayment plan. Do it sooner rather than later, as there will likely be a lot of people trying to apply — and potentially overwhelming the system — as the deadline approaches.
  3. Make payments to yourself. Save up what you would’ve used for payments for now. When the forbearance ends in December, make a lump-sum payment toward your student loan prior to the deadline. That way, you’ll receive credit for paying down any principal amount before interest starts accruing again. Even better – if your student loan did get completely forgiven, you’ll have a nice chunk of change to spend on a house down payment, shore up an emergency fund or invest for even more earnings.
  4. Even after forgiveness you still might owe money. The federal government may not tax the amount that’s forgiven on federal student loans, but your state could count the forgiven amount as income. Save your money now, just in case.

Tiffany Wendeln Connors is deputy editor for The Penny Hoarder. Robert Bruce is a senior staff writer.