You may have to start repaying your student loans as soon as August. 4 things to think about now

Yikes, you might be thinking. But don’t worry, there are options. “You should start budgeting right away for those payments,” Jacob Channel, senior economist and student loan repayment expert at Lending Tree. Good news there — many savings accounts are now paying more than they have in at least 10 years and you can see some of the best savings account rates you can get here. Channel adds that “if you can, you might even consider making payments now before the pause ends so that you can take advantage of suspended interest accumulation.”

Should you refinance once payments resume?

When you refinance your student loans, you take a new, private loan to repay an existing loan. This is typically most optimal when interest rates are significantly lower than at the time when the debt or loan was first initiated. See some of the best rates you can get to refinance your student loans here. And it’s usually far better for borrowers with private student loans than those with federal ones. 

“Even though private loans can sometimes — but not always — offer lower rates, and thus lower payments than federally backed loans, private loans are typically excluded from government programs like payment pauses, certain repayment plans, or broad/need-based forgiveness,” says Channel.

In other words, refinancing a federal loan would likely end all government-backed benefits and protections such as access to income-driven repayment plans, forgiveness programs such as Public Service Loan Forgiveness, or PSLF, and deferment or forbearance options. 

That’s why Leslie H. Tayne, financial attorney, Tayne Law Group, says refinancing is really only optimal in this case if you can secure more favorable terms. These can include a “lower interest rate [or] different repayment timeline,” she says. “For federal loans, consolidation may be required to qualify for certain repayment or forgiveness programs.” (More on that later.)

For those considering refinancing, Mark Kantrowitz, an expert on student financial aid and the author of “How to Appeal for More College Financial Aid,” says that route should only be considered if the borrower qualifies for a lower interest rate than they would pay on the federal loan. “Previously, this was mostly a benefit for borrowers who have federal loans from several years ago, when interest rates on federal loans were much higher,” he says. 

However, because of recent actions taken by the Federal Reserve, raising the benchmark funds rate to now 5%-5.25% in their latest meeting, “ there may be no opportunity to save money by refinancing their federal loans into a private student loan,” he adds. See some of the best rates you can get to refinance your student loans here.

Can you consolidate your loans? 

At its root, debt consolidation involves taking out a new loan or credit card to pay off other existing debt. Channel says going down this route can be a good idea if you have multiple loans and you want to lump them all together with a single interest rate. Direct consolidation loans are one option if you had more than one you wanted to roll together. 

That said, the debt consolidation strategy only works when you have multiple federal loans, or multiple private loans, that you would like to lump together to create one payment versus multiple. You cannot consolidate private student loans and federal student loans together into one payment. 

“Before you consolidate, be sure that you understand what you’re getting yourself into,” Channel says. “For example, people who consolidate may need to pay longer than they initially anticipated, they may also lose credit for payments they made on their income-driven repayment plan.”

Tayne explains that checking your current loan terms is critical before consolidating. “For federal loans, consolidation may be required to qualify for certain repayment or forgiveness programs,” she says, adding however that while “federal loan consolidation simplifies repayment, it does not result in savings.”

What about loan forgiveness?

While both refinancing and consolidation may be viable options for some debt holders, these strategies likely won’t work for the vast majority of borrowers with outstanding student debt. However, not all hope is lost for those expecting a lowered monthly payment. 

For instance, those with federal loans may look into student loan forgiveness. Depending on your set of circumstances, your loan may be eligible to be either forgiven, canceled or discharged, all of which essentially mean you are no longer required to pay back those loans.

Although the Biden administration loan forgiveness program has so far been suspended until a vote is made by the Supreme Court — and since the latest debt ceiling negotiations mean there will be no further payment suspensions on the horizon — there are other types of loans that are currently eligible. Check out this guide from the federal government for more on which loans currently qualify. 

If the Supreme Court votes in favor of the Biden administration’s student loan forgiveness program, and your loans are partially forgiven, Kantrowitz says those existing loan balances “will be reduced” and payments on the remaining balance would likely start in September.  

Can you get more favorable repayment terms?

Whether or not you have part of your loan forgiven or none at all when student loan repayments begin once again, there are several repayment plan options you may want to consider, all of which really depend on your own financial circumstances. Here are the most common options:

1. Standard Repayment Plan: Payments here are fixed and are expected to be paid off over 10 years.
2. Graduate Repayment Plan: Payments gradually increase over the life of the loan and are to be paid in 10 years.
3. Extended Repayment Plan: These payments can be either fixed or graduated with loans to be paid off in a period of up to 25 years. This option may be ideal for those looking to make lowered monthly payments over a longer period.
4. Pay As You Earn Repayment Plan (PAYE): This payment plan is based on discretionary income and never exceeds what you would pay on a standard repayment plan.
5. Revised Pay As You Earn Repayment Plan (REPAYE): These payments are set at 10% of your discretionary income. 
6. Income-based Repayment Plan (IBR): This payment plan can either be 10% or 15% of your discretionary income based on your income at the time it was originally opened. 
7. Income-Contingent Repayment Plan (ICR): The monthly payments for the ICR plan are 20% of your discretionary income or of the amount that you would pay over 12 years with a fixed payment plan.
8. Income-Sensitive Repayment Plan: These monthly payments are based on your annual income and must be paid within 15 years.

For borrowers struggling to repay their student loans due to economic hardship deferment, unemployment deferment, and general forbearance, other options such as extending a payment pause when repayment resumes may be a consideration, Kantrowitz says. “Interest may accrue, however, during these pauses,” Kantrowitz adds. 

Also expected to start next year is a new version of the Revised Pay As You Earn (REPAYE) Plan that would in theory cut payments in half for undergraduate debt and reduce it to zero if the borrower’s income is less than 225% of the poverty line. “If the borrower is negatively amortized (payment is less than the new interest that accrues), the excess interest will be forgiven instead of being capitalized,” he adds.