By Madeline Neumeier, CFP®, Financial Advisor, Wipfli Financial Advisors, LLC
On August 6, the Education Department announced that federal student loan relief was being extended through January 31, 2022. The emergency relief effort had been set to expire on September 30.
Administration officials indicated this would be the “final extension” of the relief program that began in March 2020 at the outset of the COVID-19 pandemic.
A reported 40 million borrowers have federally held loans. During the moratorium, borrowers have been able to pause payments without penalty. These federal student loans owned by the Department of Education have not been accumulating interest since the measure was put in place.
With a potential rush of borrowers to refinance ahead, now is the time to reevaluate your student loan planning decisions. Here are two options:
Borrowers who continued making their regular payments toward their loans will not be impacted by the extension. However, these borrowers could consider putting additional money toward their loans on top of these payments to take advantage of this continued period of no interest accumulating.
If you held off on making payments, but continued to set those funds aside, you could decide to make a lump sum payment now to reduce your principal and future interest.
While some borrowers were waiting to see whether federal student loan cancellation would come to fruition during the payment pause, we still have no clear information to believe that will come to pass.
It’s generally understood that the suspended payment months will count toward loan forgiveness programs, including Public Service Loan forgiveness (PSLF) and Income Driven Repayment (IDR) forgiveness. Borrowers who suspended payments will likely have any zero-dollar months counted as if they had continued making monthly payments on those loans.
Private refinancing rates are near all-time lows, and some private lenders are offering cash-back bonuses to borrowers who refinance now.
The industry is anticipating a rush of private refinance activity come January and February 2022 once federal student loan interest starts again. If that happens, we don’t know whether the same advantageous rates will be available or whether people will be able to refinance as quickly as they’d like.
If you are planning to refinance your student loan in the near future, it may be advisable to act soon — before lenders are bogged down by a glut of refinance applications.
Be aware, however, that borrowers who choose to refinance with a private lender may not qualify for a federal loan cancellation — if it happens. They will also be ineligible for forgiveness programs like Public Service Loan Forgiveness and Income Driven Repayment forgiveness.
How Wipfli Financial can help
Wipfli Financial advisors assist with student loan planning, helping you be efficient with your payments and maximize loan forgiveness opportunities. Talking to a professional regarding your student loans can help you choose the repayment plan and any related strategies that are right for you. Contact us to learn more.
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