Should borrowers pay off their student loans right now? Here’s what experts say
The Biden administration will announce its decision regarding the cancellation of student debt within the next few months.
In an April 25 news briefing, White House press secretary Jen Psaki said the president will make his choice before the end of the current pause on student loan payments, which expires Aug. 31.
As about 41 million people in the U.S. who have federal student loans await that decision, many wonder what they should be doing during this pause — should they pay off a lump sum of their debt or wait for Biden’s announcement?
Here’s what experts say.
Most people shouldn’t feel a ‘rush’ to pay off their loans
Many experts agree that most borrowers can afford to wait to make more payments.
“Because federal student loans offer so many benefits in terms of income-driven repayment and just flexibility for your life changing or your financial circumstances changing, I don’t think most people need to feel any particular rush to pay off these loans particularly in the context of potential forgiveness,” Kevin Mahoney, founder and CEO of Illumint, a Washington, D.C.-based online financial planning company, told McClatchy News.
He added that people should still make informed decisions based on their individual circumstances.
When the payment pause first started in 2020, Mahoney and other advisers told borrowers to take advantage of the reprieve in any way that aligned with their financial circumstances — whether that be paying off credit card debt or saving for a house.
And that advice still holds true, Brent Weiss CFP and co-founder of Facet Wealth, told McClatchy News.
This pause is an opportunity for borrowers to pay down other debts, like credit cards or car loans, or to even pay those accounts off completely so they can have more money available when student loan payments resume.
In the meantime, Weiss also recommends his clients to wait and see what the Biden administration proposes.
“For the most part, for my clients with federal student loans, I am recommending that they do not make payments until we have greater clarity on what the administration is going to do,” Weiss said.
Most people can wait — but need to be prepared
While it makes sense for most people to wait until the president makes a decision, financial experts are urging borrowers to be ready should repayments resume later this year.
“As people prepare and make their own financial decisions and prepare for different financial scenarios that apply to them specifically, just factor in the uncertainty that comes with hoping and waiting for the government to do something because, you know, the repayment timeline could change again,” Mahoney said. “The forgiveness could be paused or scrapped or delayed.”
The pause is an opportunity for borrowers to save some money to be more financially ready for whatever comes next, Weiss says.
“Say we saved the cash and say OK, let’s just hold this for now. Let’s create a lot of flexibility. If they pay off $10,000 of your debt, great. We can either pay the debt more or we can put the money somewhere else. If they don’t pay off your debt, great, we can put a lump sum toward it,” Weiss said. “To me, cash is king right now when it comes to your student loan payments.”
Watch out for high interests
For borrowers with higher interest rates, however, Mahoney warns that waiting is not the best solution.
“For some people who have particularly high interest rates on their loans, that decision at some point could no longer make as much sense because you don’t want to hold out for too long with a very high rate and incur interest that you might not need to incur,” Mahoney said.
He also acknowledged that student debt is not only a financial problem, but also a cause of a lot of stress and anxiety among borrowers. Some might prefer to pay off their debt rather than keep that weight hanging over them until news of forgiveness that may or may not come.
Temporary changes to a loan forgiveness program have already led to the cancellation of about $6.8 billion in student debt for more 113,000 borrowers who work in public service. In April, the U.S. Department of Education also announced steps to bring millions of student loan borrowers closer to debt forgiveness — and offered immediate debt cancellation to 40,000 borrowers.
Those moves came after Biden announced an extension of the pause on student loan payments until Aug. 31 — allowing time for students to plan for the resumption of payments but also giving many a “fresh start” by “eliminating the impact of delinquency and default and allowing them to re-enter repayment in good standing,” as McClatchy News previously reported.
While most adults under 29 years old support “some form of government action on student loan debt,” only 38% support total debt cancellation, according to a poll released April 25 by the Institute of Politics at Harvard Kennedy School.
This story was originally published May 12, 2022 at 9:47 AM with the headline "Should borrowers pay off their student loans right now? Here’s what experts say."
