Here’s what you should do before the student loan repayment pause ends
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- The federal student loan repayment moratorium has been extended one last time until December 31, 2022, and capital interest will be paused until July 1, 2023.
- Until then, you can take three smart steps to lower your student loan balance.
- An expert recommends paying off unpaid interest and putting as much money as possible into your student loans.
As part of his student loan forgiveness plan, President Biden announced in August that student loan payments would resume on January 1, 2023, but interest would not benefit from federal student loans until July 1, 2023.
Capital interest is unpaid interest added to your principal balance, usually after a period of patience or other non-payment. Then interest is charged on that new higher balance instead of the original amount you borrowed. This is why you may find your student loan balance is higher now than it was when you took it out in the first place.
To lower your balance as much as possible before resuming payments and capital interest, student loan expert Sonya Lewis, who has helped more than 20,000 clients navigate federal student loans through classes at The Student Loan Doctor, recommend three steps.
1. Do not refinance your student loans
If you refinance your student loans through a private lender, you will not qualify for Biden Student Loan Forgiveness. But, says Lewis, “What will happen is that the commercial market is going to be really competitive and it’s going to try to get people to refinance.”
Resist the temptation, says Lewis, adding, “I’m thinking of all the people who transferred their loans from one of the federal lenders before the pandemic, and now they have no protection. They’re not going to get any of that money from Biden. Do it. Don’t leave your loan lender.”
2. Pay before the pause ends
While student loan interest rates are set at 0%, you have a chance of lowering your principal balance before interest rates come back in again in 2023. So, says Lewis, start making payments now if you can.
“As was the case in the pandemic, if you are able to put any money into your student loans, it will help tremendously with your credit score because it basically becomes a split loan,” she says.
3. Pay unpaid interest before July 2023
For now, it’s a good idea to pay off unpaid interest – or pay off as much as you can – so it doesn’t get taken advantage of in July.
To do this, log into your federal student loan account and find out how much unpaid interest you owe, or contact your lender to find the exact number, then make a plan to pay it off.
Here’s how $1,000 in unpaid interest, for example, will affect your student loans:
- After the forbearance or deferment period when you haven’t made any payments, the unpaid interest is capitalized or added to the principal student loan balance.
- If you owe $10,000 with an interest rate of 5% over 10 years, you will pay a total of $2,728 in interest over the life of the loan.
- If you add $1,000 to your $10,000 principal balance, you’ll end up paying $4,001 in interest over the life of the loan.
- Paying $1,000 now while the principal is paused will save you $1,273 over the life of the loan.
Lewis says, “If I could go to everyone’s piggy bank right now, I’d throw some of that money into their student loan debt.”