How To Shrink Your Student Loan Debt Before Payments Restart?
Posted by Tingyu
Borrowers have gotten a long break from federal student loan payments and interest during the COVID-19 pandemic, but that relief is scheduled to run out at the end of the year.
As part of its response to the coronavirus crisis back in March, the government put student debt payments on hold, dropped the interest rates to 0% and stopped collections on defaulted student loans. Those measures are set to expire on Dec. 31.
Congress has so far failed to approve an extension. Meanwhile, President-elect Joe Biden wants to cancel $10,000 in student loan debt for every borrower — but he doesn’t take office until Jan. 20.
So, it’s looking likely that student loan payments and interest rates will return to normal after next month. And if you’ve got student loan debt you should take steps now to clear out as much as you can.
Here are a few things you can do to help pay off your student loan debt faster.
Take your payments off ‘pause’
While it might be tempting to use the remaining few weeks of the moratorium to take a break from your student loans, continuing to make your regular payments — or paying more than you usually do — is a smart idea if you can afford it.
Since the interest rates on federal student loans are frozen at 0%, any payments you make now will go entirely toward the principal of your loan.
That means you’ll be able to take a much bigger chunk out of your debt than you normally would.
Keep in mind that if you’ve got private student loans but have been given a forbearance period by your lender, your debt is still accruing interest — meaning your balances have been growing. So you should resume making your regular payments as quickly as possible.
Refinance private loans
If your student loans are indeed from a private lender, you may be able to cut down your monthly cost by refinancing your loan into a lower rate.
Whether you qualify for refinancing will largely depend on your credit score and your current income.
If you’re not sure about your credit score, there are websites that will let you check it for free online and give you personalized tips on how to boost it if it’s not in great shape.
Even if you’ve lost your job due to the pandemic, you might still be eligible for a refi if you can demonstrate investment income or income from a side gig, or find a co-signer to back your application.
To get the best rate on a refinanced student loan, you’ll need to shop around and compare quotes from multiple lenders.
Just remember that refinancing is not an option if you’ve got a federal student loan, and replacing a federal loan with a private loan will make you ineligible for any further loan relief measures from the government.
Switch up your payment plan
You might be able to clear out your student loan debt faster by switching up your current payment plan.
Although an income-driven repayment plan can help to make your regular payments more affordable, switching to a standard repayment plan could help you become debt-free sooner — if you’re able to pay a bit more each month.
This option may not be right for everyone, especially if you fear your income could be affected by another COVID-19 lockdown.
Regardless of which payment plan you’re on, you should make sure to enroll in autopay if you’ve got a federal student loan.
Signing up for automatic deposits will qualify you for an interest rate reduction of one-quarter of one percentage point (0.25), which could be very helpful if rates do return to their pre-COVID levels at the end of the year.