What to Do With Your Remaining Student Loan Debt

Eliza Haverstock
Trea Branch
Cecilia Clark
By Cecilia Clark,  Trea Branch and  Eliza Haverstock 
Edited by Des Toups

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The student debt relief plan is in limbo.

If it survives, the program will wipe away up to $20,000 in federal student loans per borrower.

If debt relief gets blocked permanently, federal student loan borrowers will have a balance waiting when payments resume.

On Nov. 22, borrowers got more time to plan. The Biden administration extended student loan payment forbearance until the debt relief plan clears its legal challenges, perhaps until late summer 2023, unless the legal roadblocks are resolved before then.

When borrowers do resume payments, they won’t just pick up where they left off in March 2020, when payments and interest were halted. Payment amounts and options could be different.

If you haven’t looked at your loan information in a while, now is the time for a review. Knowing your remaining balance, interest rate and expected monthly payment will reveal the help you need and which payment plan benefits you the most.

Here’s what to do next.

If you work in public service

Until Oct. 31, the Department of Education had offered a waiver for those whose work makes them eligible for Public Service Loan Forgiveness, or PSLF, that counted more payments toward the 120 needed for forgiveness. Those applicants who made the deadline could see full forgiveness much sooner.

But the education department is implementing another one-time, automatic adjustment of payments that does the same thing. The IDR waiver will wipe clean debts for borrowers who have been paying on their federal loans for 20 years or longer and for borrowers who've worked in public service for 10 years. Millions more are expected to move significantly closer to forgiveness of their remaining debt through income-driven repayment or PSLF.

If you missed the Oct. 31 deadline, you'll need to submit a PSLF application and employer certification by May 1, 2023, to ensure the IDR account adjustment will be applied to the PSLF count of 120 months.

One good thing: Every month you spend in payment forbearance counts toward that 120, in addition to the adjustments that apply to the payments made before the pandemic.

If you’re comfortable with your regular payments

If you've been making regular payments during the pandemic pause without financial strain, continue to do so. Keeping up payments during the pandemic means you saved money because your dollars went straight to the principal balance.

However, if you weren’t making payments during the pandemic, start setting aside your payment amount now to ensure it will fit back into your budget. By doing so, you could pay a lump sum once payments resume.

If your student loan bill is smaller after cancellation is applied, keep making your original payment amount if you can. This way, you'll save money on interest costs and pay down your debt faster.

Making space in your finances allows you time to adjust your budget if necessary. But you have other options if you can’t make it work.

If you need smaller monthly payments

If you know you’ll have problems making your monthly payments, contact your servicer to discuss options for income-driven repayment, or IDR. Four income-driven repayment plans currently set your payment as low as 10% of your discretionary income. Payments could be set at $0 if your income is low.

These plans also wipe out your remaining balance after 20 or 25 years.

Borrowers can also look forward to a new income-driven repayment option, announced alongside cancellation. The revised plan will decrease the amount of income that counts as discretionary and halve the payment percentage to 5%. It will also cut the time to forgiveness to five years for those whose original total loan balance was $12,000 or less.

While unpaid interest continues to accrue and capitalize under existing plans, the government will cover unpaid interest with the new IDR. This means borrowers who want to decrease their monthly payments — potentially by half or more — and don’t mind extending their repayment term could benefit most from the new plan.

However, high-income borrowers may not see lower payments with income-driven repayment.

If you want to pay off your debt faster

Borrowers who have been in repayment for an extended period and have taken frequent or long stretches of forbearance should review the IDR waiver of payment rules, which now counts those months toward forgiveness.

Some borrowers may see their count of qualifying payments — you need at least 240 to reach forgiveness — rise significantly and should enroll in an income-driven repayment plan as soon as possible after the account adjustment so that payments made after that date also count. The Education Department anticipates the adjustment will occur sometime in 2024 for borrowers who've not yet made enough payments to reach forgiveness.

If you want to pay down your debt faster and don’t want to refinance with a private lender, the best strategy is:

  1. Stick with the standard repayment plan.

  2. Make extra payments and ask your servicer to apply them to the loan principal.

  3. Make biweekly instead of monthly payments.

Consider refinancing if you have private student loans or high-interest federal debt that does not qualify for the above relief programs.

With student loan refinancing, borrowers replace their existing loan with a new one. Ideally, the new loan will have a lower interest rate and more favorable repayment terms.

Student loan refinancing rates have been rising, but borrowers with the strongest credit profiles may still find a lower rate.

Borrowers shouldn't refinance federal loans until at least well into 2023 — once interest-free forbearance is over. If you refinance, your federal student loans will become private and no longer eligible for federal benefits, like forgiveness and IDR. That is why it is important to consider refinancing federal loans only if you do not qualify for forgiveness programs.

The decision to refinance should come down to the long-term financial benefit, says Clark Kendall, a certified financial planner and president of Kendall Capital Management. For example, if you can get from a 7% rate to a 5% rate, you can save that 2% or increase your 401(k) contribution.

Dunn cautions borrowers also to consider their risk of losing federal benefits. “I would double-check the math and make sure you are going to be in a better position,” he says. “Maybe a slightly smaller payment doesn’t outweigh the overall benefit of having federal protections.”

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