On June 30, the U.S. Supreme Court struck down President Biden’s student-loan forgiveness program, providing disappointing news for student borrowers. This ruling, coupled with the announcement to end the pause on loan payments, served as a financial wake-up call for many Americans.
According to the U.S. Department of Education, student-loan interest will begin accruing starting Sept. 1, 2023, with the first payment starting the following month.
In a more recent announcement, the Department of Education announced a separate plan to forgive a total of $39 billion in federal student loans, affecting more than 800 thousand borrowers. This forgiveness plan largely impacts individuals on income-driven repayment plans who have been in repayment for 20 or 25 years, depending on the loan type. The Department of Education will notify borrowers directly if they qualify for this recently announced loan forgiveness.
For the rest of the borrowers, their student-loan payments have been out of sight and out of mind for three years. In an even greater shock, borrowers may owe more than they expected.
With student-loan payments restarting in October, here are some important boxes to check:
Check the terms of your loan
Most student-loan participants did not make loan payments during the pandemic break, so they may need to refamiliarize themselves with the terms of their loan. For some, including those who graduated during the pandemic, this maybe their first payment. Start by looking at your loan account and payment terms, including the interest rate and minimum payment.
Check the status of your auto payment
Check to see if you need to reinstate any suspended auto-payments. Making your payments automatic will help build them into your monthly cash flow. If possible, start budgeting for these payments or saving what you can now. It will help to have a cushion if your finances get tight.
Check on loan forgiveness or loan payment reductions
In some circumstances, you may be eligible for loan forgiveness or income adjusted loan payments. Public services loan forgiveness allows certain federal direct loans to be forgiven after 10 years of qualifying payment while working for a qualifying public service or non-profit employer.
Borrowers who have been in repayment for 20 or 25 years, depending on the type of loan, may also qualify for loan forgiveness. The Department of Education is cleaning-up some inaccuracies in the way payments were counted which is expected to provide forgiveness to many more borrowers. Most federal student loans are eligible for an income-driven repayment plan that caps your monthly payment based on your income and family size. There is some complexity to these benefits and in-depth information on qualifications can be found on the Department of Education website or at studentaid.gov.
Check with your employer on 401(k) benefits for student-loan payments
Paying student-loan debt is often cited as a reason for not contributing to retirement plans. Starting in 2024, the SECURE Act 2.0 provides that employers may make a matching contribution to retirement plans for employees’ qualified student-loan payments. This matching contribution can help you continue to build retirement savings while paying off student-loan debt — it’s a potential source of supplemental income that should not be overlooked.
Check out the terms of your other debt
The interest rate environment has changed substantially over the past three years, so it is crucial to review the terms of all your debt. The government rate for student direct loans for undergraduates is 5.5% for this 2023/24 school year compared to 2.75% for the 2020/21 school year. You may also have a car loan, credit card debt or a mortgage. Making your minimum payment is job one, then paying off your highest interest rate debt should be your next priority.
For student-loan borrowers who can afford to take advantage of the remaining interest-free months, making payments now can reduce the principle on any loans. Paying down the principle now will also save borrowers money in the long term, as less interest will accrue over time.
Check out your refinancing options
For some, it might make sense to refinance your student-loan debt, especially loans with interest rates that are even higher than this year’s rate. Consolidating multiple student loans into one payment could make it easier to manage. If you have accumulated equity in your home, tapping into a home-equity loan at a lower rate to help pay off some or all of the principal could be advantageous. If you have parents or grandparents who are willing to help out, an intrafamily loan might provide for lower payments and perhaps a gift of loan forgiveness at some point.
When considering your refinancing options, it is important to do the math and consider both the short- and long-term benefits, including any related tax benefit. Student-loan interest payments are tax deductible up to $2,500, so it may be better to contribute more to paying off your student loan to take full advantage of the tax benefit.
As the deadline for restarting student-loan payments comes into focus this fall, it is important to plan ahead, work through any options you might have and be prepared to add this payment back into your budget.
Angie O’Leary is head of wealth planning and insured solutions at RBC Wealth Management–U.S.
RBC Wealth Management, a division of RBC Capital Markets, LLC, registered investment adviser and Member NYSE/FINRA/SIPC.
RBC Wealth Management does not provide tax or legal advice. All decisions regarding the tax or legal implications of your investments should be made in connection with your independent tax or legal adviser. No information, including but not limited to written materials, provided by RBC WM should be construed as legal, accounting or tax advice.