After the latest payment and interest freeze extension, federal borrowers are now in the clear until August 31, 2022. Given that midterm elections are scheduled for November, it is probably a safe bet that repayment will not resume until early 2023.
This means that the strategy for borrowers this month is mostly unchanged.
Perhaps the biggest recent development has been the impact of inflation on the economy. Inflation can hit borrowers in several different ways. If you have variable-rate private loans, your window to refinance to a low-interest fixed-rate loan is likely closing soon. Fortunately, the refinance interest rates haven’t jumped as fast as mortgage rates. However, rates are starting to creep up. If you have variable-rate private loans, now is the time to lock in a fixed-rate loan.
On the federal side of things, the most important news is that only five months remain on the temporary changes to the rules of Public Service Loan Forgiveness. If you have been denied in the past, you might qualify now.
Finally, there is a lot of moment on the servicer front. Some servicers exited at the end of last year, while others are on the way out. Servicer transfers are a headache for borrowers but are unavailable.
Needless to say, it is a busy month, so let’s get to the tips.
Tip #1: Get Ready for a Servicer Transfer
My student loans are serviced by FedLoan (also known as MyFedLoan), and I’m not looking forward to the potential hassle in the coming months.
I’ve previously written a guide to dealing with loan servicer changes, but here is the short version:
- Watch out for scams. A confusing transition time makes it easy for scammers to take advantage of unsuspecting borrowers. Keep your guard up.
- Back up your records. Downloand or print all of your billing statements and payment records. Ideally, this information should go from one servicer to the next, but it is far from a certainty.
- Update your contact information. If you miss a payment because your old servicer sent a letter or email to your old address, they won’t cut you any slack. Updating your info might seem like you are doing them a favor, but you are only helping yourself.
Sherpa Thought: I can’t emphasize the importance of updating your contact information enough.
Many borrowers have old email addresses or mailing addresses on file from before the pandemic. Some date back to where they lived during college.
The loan servicers do not cut borrowers any slack if they miss a payment because the bill was sent to an old address.
Tip #2: Check out the Public Service Loan Forgiveness Limited Waiver
Using temporary authority from the CARES Act (the Covid relief bill), the Biden Administration has dramatically expanded access to PSLF.
The short version of the new rules is that your count of eligible PSLF payments may have gone up dramatically. Payments made under repayment plans that previously were ineligible may now count. Loans previously ineligible for PSLF can now qualify for PSLF by consolidating without losing credit for previous payments.
This page breaks down the temporary waiver and how it helps. If you work or have worked for a PSLF eligible employer, it is a must-read.
This limited waiver corrects some significant issues with the PSLF program. Many borrowers were given inaccurate information from their loan servicer about PSLF eligibility, and this new program is a huge step forward. Some borrowers will even receive massive refunds.
For the borrowers who need to consolidate to qualify, the deadline is October 31, 2022.
Tip #3: Don’t Make Federal Student Loan Payments Right Now
Some borrowers and finance experts suggest that the 0% interest is an opportunity to knock out student loan debt. The idea is that borrowers who can afford to make payments continue to make payments. At the end of the interest freeze, these borrowers will have significantly reduced balances.
While I see the merits of this approach, I think there is a better way of doing it. Rather than giving the money to the government, borrowers should use the opportunity to build up their emergency fund. Ideally, all student loan borrowers should have an emergency fund. The interest freeze provides a chance to make sure sufficient funds are available. Any planned federal student loan payments belong in this fund.
At the end of the interest freeze, borrowers can make one large payment on their student loans. If things go as planned, the result will be the same as if they continued making monthly payments.
However, there are two significant advantages to delaying the payments until the very end:
- Borrowers can earn interest on their money. This is the rare instance where a high-yield savings account will pay a higher interest rate than what a student loan charges. By being patient, borrowers can earn some money,
- Borrowers get flexibility. This is the big one. If you lose your job or get sick and face substantial medical bills, you will be glad you kept the money.
The one exception to this suggestion would be the borrowers who don’t think they have the self-control for this strategy. If making regular monthly payments seems easy, but you fear you wouldn’t send in the large payment at the end, stick with making regular payments.
Tip #4: Ask for a Refund on Your Previous Federal Payments
This tip is a continuation of the previous one.
If you made unrequired payments during the interest freeze, you might be able to get a refund for that payment.
Getting a refund only to return the money in a couple of months may seem like a waste of time. For many borrowers, it would be a waste of time.
However, having extra money in reserve, even if only for a short period, could be significant. If you are a couple of bad breaks from dire financial circumstances, getting a refund is worth the effort.
Tip #5: Start Thinking About the Repayment Restart
The repayment restart will eventually happen. My advice to all borrowers is to figure out your plan for the restart as soon as possible.
Once people start receiving bills, borrowers will have a tough time calling their servicers and getting help. The servicers estimate that in one month, they will get more calls than they usually receive in a year.
Combine that with the fact that servicers laid off staff at the beginning of the pandemic, and you have the ingredients for a challenging situation.
Borrowers that plan ahead and get their questions answered in advance can avoid the mess.
Tip #6: Now is a Great Time to Refinance Private Student Loans
For over a year, I’ve been telling borrowers not to refinance their federal loans. The big benefit of refinancing is getting lower interest rates, and no refinance company can beat the 0% offered on federally-held student loans.
The refinance companies have been feeling the pressure. With fewer borrowers looking to refinance their loans, competition has gotten intense. As a result, interest rate offerings have been very aggressive, which means lower rates and better loan terms for borrowers.
I know that many borrowers like to opt for shorter-term loans with lower interest rates, but if I had to refinance my private loans right now, I’d select a 20-year fixed-rate loan.
Here again, I tend to be conservative and prefer flexibility. A longer loan means a slightly higher interest rate but much lower minimum monthly payments. However, borrowers can always pay more than the minimum required. The benefit of a low minimum is the protection it offers in lean months.
As of May 2022, the following lenders offer the lowest rates on 20-year fixed-rate loans:
|Rank||Lender||Lowest Rate||Sherpa Review|
|1||2.76%||Splash Financial Review|
|3||4.79%||Citizen's Bank Review|