Student loan forbearance ends in September. Here’s what you can do to prepare



Sarah Tew/CNET

Student loan payments have been on pause since March 2020 due to the coronavirus pandemic, but that respite might be coming to an end in just a few months.

When he took office, President Joe Biden extended the pause, known as a forbearance, until September. Along with Democratic lawmakers, the president also wants to cancel some student loan debt. The American Rescue Plan added a third stimulus check, more money for the child tax credit, and for students, a provision to remove tax penalties for student loan forgiveness. However, there’s no agreement on how much could be canceled. It could be $10,000 or $50,000, but even with that much forgiven, some borrowers will still have a balance to pay back.

Paying off student loans can be a daunting task, especially if you’re just out of college. This forbearance period is the best time to sit down and figure out a plan to knock out your loans. 

Know your financial picture 

Before getting ready to pay off your student loans, it’s important to understand where you stand financially. List your income, your debts and other responsibilities you have. 

“While you need to make the monthly minimum payments on all of your debts (unless your student loans are within their grace period or are in forbearance), listing them out will help you to identify and prioritize which debts you may want to tackle first,” said Lauren Anastasio, a certified financial planner at SoFi. 

There are budget apps available on iOS and Android that can help with understanding your current financial status. Once you understand where your money from each paycheck needs to go, then you can start to figure out the best way to pay off your loans. 

One option is to focus on whatever account has the lowest balance while paying the minimum on the other accounts. This is known as the “snowball method.” The goal is to pay off accounts as quickly as possible. 

Or there’s the “avalanche method,” where the focus is on paying off debt with the highest interest rate. The goal here is to save the most money on interest. 

Refinance student loans 

When the forbearance ends, refinancing is a great option to consider. Loan rates are low, and there’s a good chance that with a high credit score, you could get a lower interest rate. Just dropping the annual percentage rate by 1% on a $20,000 loan over 10 years could save you more than $1,000. 

Before choosing a bank to refinance a student loan, you have to double-check the numbers. Make sure you’ll get a lower APR than you have currently, and that it’s at a fixed rate. Adjustable rates will be lower, but it’s hard to determine how things will change in the future. 

The other number you have to check on is the monthly payment. Student loans can have terms of up to 25 years, which can make for a low payment. Banks that refinance will likely limit you to 10- or 15-year terms, potentially increasing what you pay each month. But you’ll pay far less interest overall. If you can handle the larger monthly payment, then refinancing could be beneficial. 

What’s important is to make the ideal choice for what you can afford. 

Paying a little extra

For some people, this is easier said than done, but any extra payment will be a benefit. For example, let’s say you have a $20,000 student loan with 5% interest that you want to pay off in 10 years. Your payment would be $212 a month, and the total amount paid at the end of the term would be $25,456. Adding just $10 a month to your payment would save you $300 in interest and pay off the loan six months earlier. 

Cutting your monthly expenses by even a small margin, and then using that extra money on a student loan can make a big difference. Every dollar helps. 

Don’t ignore the problem

It’s easy to forget about student loans now, thanks to the forbearance. But that reprieve won’t last forever, so it’s best to come up with a plan. 

Loan servicers have options to make your payment more affordable if you’re still not secure financially. Don’t push these loans off. If you do, it could negatively affect your credit. And ultimately, the government can garnish your paycheck by 15% to pay for loans in default.  

Here are some other good ideas, to use as inspiration:

How to be totally prepared for your first student loan payment

How to pay off student loans fast

8 tips for paying off student loans fast