Should You Wait For Your Student Loans To Be Cancelled? - Forbes

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Should you wait for student loan cancellation?

Here’s what you need to know.

Student Loans

After nearly a year, and in some cases longer, some student loan borrowers are still hoping for student loan cancellation. To date, however, there hasn’t been any wide-scale student loan cancellation. If you have student loans, you may be wondering whether you should wait for student loan cancellation, if it ever comes, or take a more proactive approach to student loan repayment. Here’s what to consider:

Option 1: Wait for student loan cancellation

You could wait it out and hope that your student loans get cancelled. While there hasn’t been any wide-scale student loan cancellation, that doesn’t mean there won’t be any tomorrow. Progressives in Congress are still calling on Biden to enact student loan forgiveness ranging from $10,000 of students to all $1.7 trillion of private and federal student loan debt. Biden has asked the U.S. Department of Education to opine on whether the president has the unilateral legal authority to enact student loan cancellation by executive order without furthere authorization from Congress. Education Secretary Miguel Cardona may deliver that non-binding legal memo to the president within weeks. For Biden to have the legal authority, however, the Education Department would have to conclude that Biden has complete and absolute authority to cancel an unlimited amount of student loans for all student loan borrowers. That’s a high bar to establish. Why? There are several legal reasons why the president doesn’t have unilateral authority, including that the statutory language in the Higher Education Act of 1965 is ambiguous. The Education Department also found in January during the Trump administration that the president didn’t have such authority. Therefore, Biden’s Education Department would have to reach the opposite conclusion, even though the Education Department conducted a similar analyiss only a few months ago.

Option 2: Refinance your student loans + wait for federal student loan forgiveness

A second option is to refinance your private student loans and keep all or some of your federal student loans outstanding. Why? There are at least 5 signs that Biden won’t enact student loan cancellation. Most likely, if there is any wide-scale student loan cancellation, it would apply to federal student loans only. While some legislators have called for private student loan forgiveness, the leading proposal in Congress from Senate Majority Leader Chuck Schumer (D-NY) and Sen. Elizabeth Warren (D-MA) applies only to federal student loans. If Biden proceeds to cancel student loans, he likely would cancel federal student loans only that are owned by the federal government. Therefore, you could refinance your private student loans now, particularly since rates for student loan refinancing have dropped to a record low. That’s great news for student loan borrowers. The next question is to decide whether you refinance some or none of your federal student loans. If there is $10,000 of student loan cancellation, you could keep $10,000 of federal student loans outstanding and refinance the remainder. If you think there will be $50,000 of student loan cancellation (which is highly unlikely), you could keep $50,000 of federal student loans outstanding and refinance the remainder. In either case, the goal is to save money on your student loans through student loan refinancing by getting a lower interest rate, a lower monthly payment, or both.

Option 3: Refinance all your student loans

A third option is similar to the second option, but there is a slight difference. If you don’t think there will be any student loan cancellation now or in the future, you could refinance all your student loans now, including both private and federal student loans. Importantly, when you refinance federal student loans, they become private student loans. As a result, you wouldn’t be eligible for any future federal student loan forgiveness. The upside, however, is that you get a lower interest rate, which can help you save money each month and pay off your student loans faster.

Option 4: Make extra student loan payments now

A fourth option is to make extra student loan payments now so that you can pay off student loans faster. To make extra student loan payments, you can either increase your monthly payment amount, or you can send a separate payment each month. In either case, contact your student loan servicer to alert them in advance of your student loan repayment strategy. Inform your student loan servicer that any extra payments should be applied immediately to reduce your principal and interest balance and should not be held until next month’s payment. You might not prefer this approach since federal student loan payments are paused through September 30, 2021. However, even small dollar amounts will directly lower your principal student loan balance since currently there is no interest accrual on your federal student loans.

Student loan cancellation: Additional considerations

These aren’t the only considerations when it comes to student loan cancellation. For example, if there is any student loan cancellation, it’s unlikely it would apply to all student loan borrowers. For example, Warren and Schumer’s proposal applies only to student loan borrowers who earn up to $125,000 annually. If your income is higher, you likely won’t get student loan forgiveness and should consider alternative options such as student loan refinancing or income-driven repayment. It’s also possible there is a lower income threshold than $125,000. If Biden cancels student loans, the most likely amount would be $10,000. If you have more than $10,000 of student loans, which the average student loan borrower does, you’ll want a game plan for your remaining student loans.

Will your student loans get cancelled? There’s no guarantee either way, but it’s looking increasingly likely that there won’t be any student loan cancellation from the president or in Congress. Biden also didn’t include student loan cancellation in his latest stimulus package, infrastructure package, or budget proposal. Most importantly, when deciding whether to wait for student loan forgiveness, do what’s best for your unique personal and financial situation. For some borrowers, that could mean waiting for the chance for student loan forgiveness but paying a higher interest rate. For other borrowers, they prefer to get a lower interest rate now or make extra student loan payments, even if there is some student loan forgiveness in the future. Make sure you have a game plan for your student loans. Here are some potential options to consider: