If you finished college in 2020 or 2021, it won’t be much of a surprise to learn that, like so many other things, repaying student debt will be a little different for you.
Graduating during this pandemic means navigating a tough job market and unique student loan rules. Some of these rules are still subject to change.
However, amid the chaos and confusion, there is opportunity. Today I’ll share guidance designed especially for classes of 2020 and 2021.
Get Ready for Interest Rates to Go Up on Federal Student Loans
One of the few bright spots of the last year has been the 0% interest rate on federal student loans. Not only are payments not required at this time, there is almost no incentive to pay down your federal loans.
Unfortunately, this will eventually come to an end. That could happen as scheduled this fall, or it could be extended yet again. What we do know for sure is that the loans will eventually return to their original interest rates.
Once interest resumes, you will suddenly feel your budget tighten, and student debt will become a more pressing issue. Until that time, I suggest the following two steps:
- Build up your emergency fund – There are a ton of variables over the next couple of years. Having some extra cash set aside just for an emergency isn’t a luxury; it is a necessity. Your emergency fund doesn’t need to be huge, but it shouldn’t be ignored.
- Take a peek at your future payments – The Department of Education has an excellent resource called the Loan Simulator. The Loan Simulator allows borrowers to preview monthly payments on all of the available federal repayment plans. Getting a glimpse of your future bills will help things go smoother once repayment starts.
Don’t Refinance Federal Loans Too Soon
Student loan refinance is a popular tool to lower interest rates and speed up repayment. Used properly, it is an excellent resource. But, misused, it can be a huge mistake.
If you just finished school, it is probably too soon to refinance your federal student loans. The big danger with refinancing is that it converts federal student loans into private student loans. This conversion is a big deal because private student loans don’t have income-driven repayment plans or options for forgiveness.
Wait until your finances are solidly under control before considering refinancing federal loans. Because there is no way to undo loan refinancing, play it safe by avoiding the process until you are confident it is the right move for you.
Refinance Private Loans Whenever the Opportunity Arises
Refinancing private loans is significantly less risky. Because the loans are already private, borrowers won’t be giving up any of the federal protections. Instead, borrowers trade a higher interest loan for a lower interest loan.
A nice feature of the refinance process is the lack of expenses. Borrowers don’t have to pay application fees or any other transaction costs. If you can get better loan terms, it usually makes sense to refinance the private loans.
The downside is that the best refinancing terms are only available to the people who need the least help. If you have an excellent credit score and a good job, refinancing is an easy process likely to lead to significant savings. However, if you are struggling to get by, refinancing may only offer further disappointment. As your income or credit score improves, the refinance options and rates will also improve. For this reason, borrowers should investigate refinancing whenever their credit profile improves. Common improvements include getting a new job, paying off some debt, or having negative items fall off your credit report.
If you are going to refinance right now, the best option is probably a 20-year fixed-rate loan. The extended repayment length doesn’t obligate borrowers to stretch repayment out 20-years. A borrow is allowed to pay off a 20-year loan in five years without penalty. The value of a longer loan is that it lowers the minimum required monthly payment. This provides valuable flexibility. The downside of a longer repayment period usually is much higher interest rates. However, the current offerings for these longer loans are quite low.
| Rank | Lender | Lowest Rate | Sherpa Review |
|---|---|---|---|
| 1 |  | 6.08%* | Splash Financial Review |
| 2 |  | 6.64% | ELFI Review |
Borrowers opting for a 5-year loan may find rates around 2%, but the longer loan is probably a better deal for recent grads due to the increased flexibility.
Get Advice from Others but do your own Research
The rules for student loans look a lot different than what they did ten years ago. Loan terms are different, and repayment plans have changed. This is especially true for 2020 and 2021 graduates. Changes to student loan repayment plans and pandemic-specific relief mean the traditional strategies won’t always apply.
Well-intentioned friends and family may offer outdated advice. They may also have excellent tips and suggestions. You will have to do your own research before you know anything for certain.
Talking with others is a good thing, but it can’t be the only thing you do. Think of these conversations as brainstorming. Getting input from other borrowers is a great way to generate ideas, but more work is still required before reaching a final plan.
Verifying information through studentaid.gov is a good start. Chatting with your loan servicer can also be helpful. Keep in mind that loan servicers will be extremely busy once repayment begins for everyone, so having these conversations before repayment starts is advised.
What About Student Loan Forgiveness from Biden?
At this point, nobody knows for sure what will happen. President Biden canceling some student debt is a possibility. However, the most likely outcome will probably be that nothing happens.
If any debt is forgiven, the most likely amount is $10,000. Thus, lowering your balance from $20,000 to $15,000 probably won’t impact any cancellation. However, lowering your balance from $12,000 to $7,000 may result in less debt forgiven.
Borrowers optimistic about cancellation happening should keep this in mind as they make a plan to eliminate their debt.
