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Snapshot: Federal Student Loan Forgiveness

A version of this article was originally published by our colleagues at Goldman Sachs Ayco Personal Financial Management

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On August 24, President Biden announced a monumental step in student loan forgiveness.

If you’ve got federal student loan debt, you’re not alone: 45 million Americans do. While the pause on repayment has offered some breathing room, borrowers are awaiting specifics on the president’s student debt relief plan.  

Here’s what we know so far:

  • Up to $10,000 of undergraduate student loan debt will be forgiven.
  • Up to an additional $10,000 of debt will be forgiven for Pell Grant recipients. 
  • The total debt forgiven won’t exceed the amount still owed.
  • To qualify, individuals must earn $125,000 or less in gross income.
  • The pause on student loan repayment has been extended through December 31, 2022 and will not be extended again.   
  • When loan repayments resume, the monthly payment will be capped at 5% of monthly income (instead of the current 10% of monthly income cap).

Smart steps you can take before student loan repayment begins

For many of us, student loan payments can be a significant bill to pay each month. The average monthly student loan payment is about $460 according to the Education Data Initiative, a research organization that collects data and statistics about the US education system. 

While the loan forgiveness plan and pause on repayment will be helpful for many, it’s important to keep in mind that loan payments will resume for many borrowers down the road. 

Here are a few tips to help you prepare.

  • Revisit the details of your current federal student debt. Make sure you know your balance, how long you will need to make repayments before your loans are paid off, your interest rate and repayment type. 
  • Explore your refinancing options. Consolidating your loans with one lender may result in a lower interest rate. Your interest rate will be based on your credit score and current interest rate environments. 
  • Work on your credit score. One way to do so is to pay off other debt like high interest credit cards. This will help improve your credit score so you can take advantage of lower rates should you choose to refinance any remaining debt.  
  • Plan for your loan payment in your monthly budget now. You can use your monthly repayment amount to pay down other debt or earmark for savings (like your emergency fund.)

 

Bottom line? Exploring all of your options and making sound decisions about student loan debt can make a big difference over the life of a student loan. You made an investment in yourself with your education. Now make sure you have a plan in place to pay back your loans.

 

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