Why aggressively repay student loans now if you might not have to repay them later?
You’d be forgiven for asking that question. You’d even be excused for going further down the rabbit hole, imagining a whole series of apocalyptic scenarios: the Federal Student Aid (FSA) system collapsing, the stock market crashing with it, followed by mass forgiveness.
Although such a student loan bailout is fair to wonder about, it’s dangerous to hinge your hopes on one. That said, there are a couple of situations where dragging out your repayment does make sense.
Why it’s dangerous to delay student loan repayment
An experienced journalist representing an activist group’s blog recently asked me this question: Why should borrowers repay their debt if climate change is ending the world?
I coughed audibly into the phone. Sensing my surprise, he pointed to the genuine effects of global warming and concluded that consumers strapped with student loans should focus on more important priorities, such as protecting the planet.
In fact, there are many possible events that could make student loans moot, each with varying degrees of likelihood — ranging from some new sort of student loan emancipation program to catastrophic climate change, revolution or even world war.
But while it’s true that anything could happen down the road, you probably don’t want to build your life around it. More likely than not, your outstanding balances will still be outstanding years from now if you delay repayment.
Here’s the danger: If you delay repayment but your debt doesn’t disappear on its own, you could be left staring down the barrel of an even larger balance, thanks to accrued and capitalized interest, plus late-payment, collections or court fees. Your personal financial life would be in a mess.
Say you have $30,000 worth of loans, due to be repaid at 6.00% interest. Neglecting the debt for a single year would balloon your balance closer to $32,000. Ignore it for five years, and you’d then be staring at almost $40,000. You can see where this is headed.
Two scenarios to slow-play your student loan repayment
That’s not to say that attacking your debt with reckless abandon is always the answer. There are two cases in particular when it might be wise to take a snail-like approach to your student loans:
1. You can’t afford your monthly payments
If you fall into this bucket, you might be tempted to ignore your loan servicer or lender’s emails, letters and calls hounding you for repayment. But instead of skipping out on your minimum monthly dues, consider your options to pause or reduce them.
On the federal loan front, you could apply for a deferment or forbearance. The temporary break in your repayment, which could span up to three years, would give you some breathing room in your budget. In some situations, though, this might result in interest accruing onto your balance until you resume repayment.
Another option would be to decrease your federal loan payment amount to a more manageable figure by switching from the 10-year standard repayment plan (to which you were assigned originally) to an income-driven repayment plan (IDR). IDR plans cap your monthly payment at a percentage of your discretionary income, which you would recertify annually.
Private student loans, however, are a little different. Adjusting your minimum monthly payment on your private loans (if you have any) isn’t always possible. Contact your lender to review your options — it’s still possible your bank, credit union or online creditor could offer an economic hardship forbearance.
You might also consider student loan refinance: Switching to a longer repayment term, say from 10 years to 15, could lower your monthly obligation. Note that this could also result in you paying more interest over the life of the loan, though you might also potentially score a lower interest rate on the refinancing to offset this.
2. You’re working toward legitimate federal loan forgiveness
One benefit of IDR plans for federal loans is that your remaining balance would be forgiven after 20 or 25 years. That’s nice to have going for you, but it’s not always a money-saver — that is, unless you earn a low wage, as it will likely keep your payments similarly low for two decades.
You’re more likely to find faster savings via programs like Teacher Loan Forgiveness and Public Service Loan Forgiveness (PSLF), which take five years and 10 years, respectively, to achieve.
Say you have that same $30,000 in federal loans to be repaid at 6.00% interest. Let’s also assume that you earn about $50,000 per year working for a PSLF-eligible employer. By only paying the minimum payment for a decade on an IDR plan, you could receive close to $8,000 of forgiveness.
Public Service Loan Forgiveness Calculator
If you had more aggressively repaid your five-figure debt, there might not be much or anything left to be forgiven at the 10-year mark — hence, the slow-play strategy works in this case.
But even if you’re not a teacher or you don’t work for a PSLF-eligible employer, it’s still worth investigating other student loan forgiveness programs. If you find one that fits, it could be a legitimate reason to slow down your repayment. (However, keep in mind that there are some risks involved with PSLF.)
It’s OK to play it slow — but do it for the right reason
Yes, there are more critical issues in the world than your student loan debt, such as your health or even that of the planet. And, yes, it’s remotely possible that government legislation or another macro event could ease or erase your loan burden down the road.
But avoid passing the buck on your education debt now in hopes of a bailout later. By managing your loans in the context of everything else occurring in your world, you can keep them current and make sure your financial life stays on track.
If you’re still attracted to the idea of slow-playing your student loans, consider the option of being strategically passive (or extremely aggressive) in repayment.
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