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Federal Loan Payments Resume: How Do I Pay Off My Student Loans?

College grad stressed about student loans.
Student loan payments resume - 58% don't feel prepared.

With October 1st right around the corner, college grads have one question in mind:

How will I pay for my student loans?

As states across the country were shutting down in March of 2020, the federal government also extended some grace by pausing student loan payments on March 13th and setting the interest rate to 0%. That year, the total US student loan balance reached $1.6 Trillion[1]. Over the next three plus years, the vast majority of federal student loan borrowers had a significant reprieve from their monthly payments and nearly everyone took advantage of the pause. In fact, only 1.16% of all federal student loan borrowers kept paying their loans during the pause[2]. What does that mean in actual dollars?

  • Current average federal student loan balance is $37,338[3].

  • Current federal loan interest rate is 5.5%[4]

  • Average interest on that balance is about $170 per month.

  • From March 13, 2020 to Sept 1, 2023, a borrower could have paid off $17,019.24 of principal with consistent monthly payments ($405.22 in this example).

  • During the same number of months with interest accruing, a borrow would have paid over $6,000 in interest.

The other 99.84% of borrowers either made intermittent, infrequent, or no payments at all on their student loans. For some in this population, this was pure grace as they navigated furloughs, job loss, recovery from illness, and other extenuating circumstances. Others used this time to save and purchase items like cars and homes. Others used the “extra” $405.22 each month to enjoy life. In fact, 44% of borrowers spent their “extra” money on retail items[5]. This segment of the population lost out on a massive opportunity to save real dollars as the above example describes.

In light of the recent SCOTUS decision, what does this mean for the average American? Most importantly, research shows that 58% of borrowers are unprepared for payments to resume in October[6]. Odds are that this percentage is going to be even higher for any graduate of the past three years who have NEVER made a student loan payment due to the COVID forbearance and whose budget never accounted for such a payment. So, what’s the next step.

Let’s look briefly at one option that some folks take advantage of: Income Based Repayment Plans. When I did a brief stint doing missionary work that came with a very small stipend, I qualified for this plan. This could be a short-term solution for many folks, but it is not a credible solution for even the medium-term. Why? Because many borrowers using an income-based option only pay on the interest which could even cause your overall balance to increase over time. Rather, the only course of action that causes your balance to decrease is to continue making payments. This may mean making hard decisions such as taking on a second job, picking up a side-hustle, or reducing your spending in other areas of your life. But continuing to make your full payment, while requiring some sacrifice, keeps your forward progress going. If you can keep making progress even if requiring momentary sacrifice, this is always the best course of action when you keep the big picture in mind which includes the ultimate goal: to pay off your student loans.

How can a student loan borrower reduce financial stress and make progress? Knowing how much money you make and what comes in week-to-week and month-to-month is only the start. Knowing your outflows and being in control of them is far more important. That’s why someone making $60k a year can cover all of their bills and feel financially secure while someone making $250k a year can feel like they just can’t get ahead (30% of those earning $250k or more – that’s a quarter of a million dollars per year – are living paycheck-to-paycheck[7]). This clearly shows that controlling your outflows is perhaps the most important step and applying this principal directly relates to your ability to begin repaying student loans.

Most people I meet don’t know how much they spend every month on groceries, home items, or other areas of their lives. This is the first step – information. In the same way, most weight loss programs have you calorie counting, tracking points, logging food, or counting steps. Instead of being reactionary to what happens to you, information allows you to become proactive. So, you have to know how much money you bring in and how much you spend in any given month. Not in general, but in specific.

The only way to truly understand your financial habits is to have a thorough budget. To prepare for your student loan payments this fall, you need a plan for where each dollar of your paycheck is going. This budget is your first step to understanding how your student loan payments fit into your financial life and how you will attack this debt so that you can live your life and achieve your future goals. Check out the introductory budget on the free Resources page to get going.

If you want help navigating your student loan payments, put a financial coach in your corner.











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