In the past years US government implemented a significant measure to alleviate financial burden by temporarily suspending all federal student loan payments. This pause also included the suspension of interest accumulation on these loans.
However, recent legislation indicates that the pause on student loan payments will come to an end on June 30th and interest on the loans will resume, and borrowers will be required to resume making payments shortly thereafter.
While the payment freeze has undeniably been a source of relief for millions of borrowers, there are potential benefits to consider for those who have the means to make payments during this period.
Here are 7 reasons to start making student loan payments now.
1. Student loan forgiveness is limited to $10,000
Even if you currently lack the financial means to make payments during the student loan payment freeze, it is still beneficial to allocate any available funds towards preparing yourself for when payments resume.
The average student debt burden is approximately $37,000 for borrowers. While President Biden’s proposed student loan relief plan aims to provide some relief, it only forgives $10,000 of debt for most borrowers. However, if you were a recipient of a Pell Grant, you may potentially qualify for $20,000 in forgiveness.
It is important to note that the implementation of the proposed plan is currently facing obstacles in the Supreme Court, and there remains uncertainty regarding the final outcome. There is a possibility that no forgiveness will be granted, emphasizing the need for borrowers to be prepared for a scenario where no relief is received.
2. Currently there is no interest on your loan
One of the significant challenges faced by many borrowers is the impact of high interest rates, which can make it feel like their monthly payments barely make a dent in reducing their principal balance—the original amount borrowed—no matter how substantial their payments may be.
However, by choosing to make payments during the student loan payment freeze, you have a unique opportunity to make significant progress in reducing your principal balance. Since the freeze has paused interest accrual, every dollar you contribute goes directly towards paying down the principal amount once any existing interest has been satisfied.
This puts you in a better position when regular payments resume, as your outstanding balance will be lower, and you will be closer to achieving full repayment.
3. Average student loan interest rate is 6%
Expanding on the topic regarding the freeze on interest, it is crucial to emphasize the significant potential savings that can be achieved by making payments before the resumption of interest accrual.
The average interest rate on existing student loans stands at approximately 6%. This percentage may seem modest at first glance, but when considering the magnitude of debt that many borrowers face—often amounting to tens of thousands of dollars—it becomes apparent just how much money is being added to the balance each month.
With interest accruing on a daily or monthly basis, even a seemingly small interest rate can accumulate substantial costs over time. For borrowers carrying significant student loan debt, the monthly addition of interest can quickly compound, leading to a significant increase in the total repayment amount.
By making payments during the period of frozen interest, you have a unique opportunity to halt the growth of your balance and save a considerable amount of money. Every payment made directly reduces your principal balance, without the additional burden of accumulating interest.
4. You can pay whatever amount you want
It is a common misconception that borrowers are obligated to pay the same fixed monthly amount during the freeze as they did before. In reality, one of the advantages of the freeze period is the flexibility it offers in determining the amount and timing of your payments.
During the freeze, you have the freedom to choose the payment amount that aligns with your financial situation. Whether it’s a modest $100 one month or a more substantial payment of $1,000 the next, the decision is entirely in your hands.
The ability to determine the payment amount and schedule during the freeze empowers you to manage your finances strategically. It allows you to align your repayment strategy with your financial capabilities, ensuring that you make the most effective use of your resources.
5. Student loan forgiveness may not be approved
Although many individuals would greatly benefit from any type of student loan forgiveness, it is important to acknowledge that widespread relief is not guaranteed.
The Supreme Court is currently deliberating on the legal authority of the Biden administration to forgive $10,000 of student loan debt for most borrowers. This deliberation introduces an element of uncertainty and raises the possibility that the court may ultimately reject the proposed plan.
In such a scenario, borrowers’ loan balances would remain unaffected, and the expected relief would not materialize.
It is essential to recognize the inherent unpredictability of legal proceedings and the potential for outcomes that diverge from initial expectations. While there is considerable support for student loan forgiveness, the final decision lies within the purview of the court.
Therefore, borrowers should be prepared for the possibility that the proposed forgiveness plan may not be upheld, and their loan balances will remain as they currently stand.
6. You’ll pay off your student loan faster
The day when borrowers make their final student loan payment is often seen as a moment of triumph and relief. It represents the culmination of years of hard work and financial commitment.
However, what many borrowers may not realize is that the actions they take during the deferment period can significantly impact the timeline to their ultimate loan payoff.
Emerging from the deferment period with a lower balance can potentially speed up the pay-off date, bringing it closer—potentially much closer—depending on the amount they are able to allocate towards reducing the principal during the freeze.
7. You’ll pay less interest
Gaining a clear understanding of how interest works is crucial when considering repayment plans, as it allows borrowers to make informed decisions and develop realistic expectations about the potential accumulation of interest over the years, especially when dealing with higher interest rates.
Interest is calculated based on a percentage of the loan’s principal balance. The higher the interest rate and the larger the principal balance, the more significant the interest accrual will be over time.
This means that even a seemingly small reduction in the principal balance can have a substantial impact on the total amount of interest that accumulates over the life of the loan.
By taking proactive steps to reduce the principal balance, borrowers can effectively minimize the long-term impact of interest. Every dollar applied towards reducing the principal serves as a safeguard against interest accrual. Even modest reductions can yield substantial savings in terms of interest over the course of the loan.
