By Andrew Paulson, CSLP, Lead Student Loan Consultant and Co-Founder of our partner site StudentLoanAdvice.com
With less than a month before the loan holiday was to end in May 2022, the US Department of Education has postponed federal student loan payments yet again. Direct federal student loan payments have been on hold now for more than two years dating back to March 2020, and now, those who took out loans don't have to begin paying them back until at least September 1, 2022.
There is a school of thought that says now that the student loan holiday has been extended yet again, maybe you should continue paying down your loans. I will discuss why that’s a bad idea for those going for student loan forgiveness—and why it’s both good and bad if you still have big student debt from medical school (or grad school) but aren’t going for forgiveness.
First, let’s review how we got here:
In March 2020, President Donald Trump, by way of the CARES Act, froze interest and payments for borrowers with direct federal student loans. This also provided relief for borrowers in default. The first extension was set to expire in September 2020. With the pandemic continuing to wreak havoc on the world, it was postponed until January 2021. President Joe Biden has continued in lockstep with additional loan extensions.
As is generally the case for either party that holds the White House when midterm elections roll around, Democrats face a steep climb to retain seats and their control in Congress. I expect another extension just before the mid-terms in November to bring younger voters to the polls and even up the race in Congress. If student loans are pushed back again, assume that payments will resume on January 1, 2023.
2 Common Paths for Paying Down Student Loans
Two of the most common paths for paying down your loans are:
- Income Driven Repayment (IDR) to Public Service Loan Forgiveness (PSLF)
- Private Refinancing
There are a select few of you pursuing 20-25 year taxable loan forgiveness. But most high-earners who read this blog would never need to consider it an option unless they're in a specific situation.
Let's discuss these two common paths and a way to think about them while the student loan holiday still exists.
Why It’s a Bad Idea to Pay Now If You ARE Going for Student Loan Forgiveness
If you are going for student loan forgiveness, your objective is to minimize your monthly payments as much as possible. While payments and interest are on hold, each of these months will count as credit toward your forgiveness track even if you're not actually paying any money (remember, to reach PSLF, you need to make 120 on-time payments). For those pursuing PSLF, all you need is qualifying employment—full-time employment at a non-profit or 501(c)(3)—for these months to count as credit.
At this point, you’re not required to make a monthly payment on direct federal student loans. This means you shouldn't put money toward your federal loans unless you are trying to pay them off before you reach forgiveness. Each dollar you don't pay to your loans is a dollar you can repurpose any way you’d like, whether that’s saving for retirement, saving for college, buying a rental property, or purchasing that dream home.
Making payments to your servicer now when you’re going for forgiveness is like throwing your dollars into a black hole. Just remember, you want to MAXIMIZE your forgiveness at this point and not pay a penny more.
These months with $0 required monthly payments count toward those 120 payments just as much as those high monthly payments you were making pre-pandemic— or those payments you’re anticipated to make when your income jumps after training and when the student loan holiday ends.
Why It’s a Good Idea to Pay Now If You’re NOT Going for Student Loan Forgiveness
If you’re not going for student loan forgiveness, there’s a good chance you should be paying down your student loans now if you have a long-term horizon of 15-20 years. The reason is that most people not pursuing loan forgiveness will privately refinance their student loans, because they can typically cut their interest rate in half. This process can save the borrower thousands of dollars in the long run.
Many planning to refinance their federal student loans have stayed on the sidelines during the federal loan holiday, stacking those Benjamins in a high-yield saving account, an index fund, or their favorite crypto. There was no reason at the time to privately refinance, because they would be excluded from the 0% interest, would have to begin repayment earlier when the rates were still low, and would lose the chance that all or a portion of their loans were covered through widespread loan forgiveness.
However, with inflation spiking to the highest its been since the 1980s, the Federal Reserve has begun raising rates to help offset inflation. The first rate hike was in March 2022, and the Fed has indicated there will be more during the year.
Those who are planning to refinance over a long term could end up worse off if they don’t refinance their loans now with interest rates rising. Here are two examples that help explain it:
1) A dentist owes $350,000 in student loans at a 7% interest rate. Their loans are growing at $24,500 per year ($350,000 * 7.00%). The borrower, who continues to pay nothing during the loan holiday, then refinances to a 20-year loan at 4.5% at the end of the federal loan holiday.
2) A doctor owes $350,000 in student loans at a 7% interest rate and decides to opt out of the federal loan hold and refinance now to a 20-year loan at 3.5% before the interest rates continue to rise.
Dentist
- Monthly payment = $2,214
- Interest paid $181,425
- Total paid = $531,425
Doctor
- Monthly payment = $2,030
- Interest paid = $137,166
- Total paid = $487,166
The difference? The doctor is out of debt four months earlier and pays ($531,425-$487,166) $44,259 less than the dentist does. The reason why the doc pays less is because of the lower interest rate, even though they started paying their loans earlier and didn't take advantage of 0% interest.
Please note: I'm not suggesting rates will go up 1% by the end of the year, but they certainly could.
What if you’re planning to live like a resident or pay your loans down in less than 10 years? Let’s discuss this in the next section.
Why It’s a Bad Idea to Pay Now If You’re NOT Going for Student Loan Forgiveness
It could be a bad idea to pay down your loans now even if you aren’t going for student loan forgiveness. As mentioned above, most who are not planning on loan forgiveness will privately refinance their student loans.
Many of those are considering the risk of waiting to refinance their private loans with interest rates rising. Those who are planning to refinance over a short term (5-7 years) could end up better off if they don’t refinance their loans now. Let me explain with these two examples:
1) A dentist owes $350,000 in student loans at a 7% interest rate. Their loans are growing at $24,500 per year ($350,000 * 7.00%). The borrower then refinances to a five-year loan at 3.5% at the end of the federal loan holiday.
2) A doctor owes $350,000 in student loans at a 7% interest rate and decides to opt out of the federal loan hold and refinance now to a five-year loan at 2.5%.
Dentist
- Monthly payment = $6,367
- Interest paid = $32,027
- Total paid = $382,027
Doctor
- Monthly payment = $6,212
- Interest paid = $22,695
- Total paid = $372,695
The difference? The dentist and the doctor will now pay a much similar amount to pay down their student loans. But the doctor still pays a little less because of the lower interest rate.
Again, I can’t provide you with certainty that rates will go up 1% by the end of the year, but they certainly could. This is definitely a situation that merits your consideration when running the numbers.
I understand your situation might not exactly fit the example. Whatever you are considering—PSLF, private refinancing, or maybe a mix of the two if you and your partner both have loans—don’t wait to execute on the optimal plan. The only thing I can provide you with certainty is that student loan rules and laws will not stop changing.
Quit wondering about how you’ll tackle your student loans and let an expert guide you through your options today!
Are you thinking about making payments during the student loan holiday? Why or why not? Comment below!
The issue of deferring student loan payments falls under the category, “Just because you can, doesn’t mean you should.” As high income earners, our written financial plan should really not be affected by a program really intended for a different population of earners (unless going for PSLF). I agree with the article that if your debt load is high and your interest rate to refinance will likely go up, then you need to take this into account for your long term payoff (which still argues for paying down the debt). However, if you are doing it correctly as a high income earner (saving and investing the necessary amount to achieve your financial goals on the timeline you desire), then the student loan deferment should not really change your goal of getting your debt paid off. It is not a free ride. It will need to be paid off, so stick to your plan and pay down the debt if your not in financial hardship. Being debt free is part of the plan for the vast majority of us.
SimpleMD,
You bring up a good point. If you are doing the long term paydown and you are disciplined with investing you could be better off waiting. Imagine you set aside the payments you would be making now if you refinanced in a taxable account. Let’s say you put six months of payments in an investment account, about 12k invested. Assuming a 7% rate of growth each year, in 20 years it could be worth more than you having to pay an additional 44k in student loans. Some just aren’t disciplined enough to do this though.
Andrew StudentLoanAdvice
I agree from a math standpoint when looking at a return on an investment, you are correct. No doubt, it will make more math sense to invest it. Ultimately, this now comes back to the more philosophical debate of leveraging debt for returns vs paying down debt for peace of mind.
It always makes “math sense” to maximally leverage your life. But at a certain point, it’s not a good idea.
I’m not sure you can really know the intent of Congress (which is made up of hundreds of individuals) and even if you could, who cares about intent? If they intended something to only be used by certain people, it isn’t that hard to write the law that way. But I do agree with you that it is highly likely that the lion’s share of PSLF received will go to docs. The whole idea of student loan forgiveness, of course, is antiprogressive. We’re rewarding the most educated.
SimpleMD nails it.
What does YOUR financial plan entail? Is it to pay down debt, and then use those excess funds funds to build wealth? How much do you value being debt-free?
It’s helpful to see what the numbers show, but ultimately it’s important to refer back to what’s best for you and your family. As with so much in finance, it’s decision like this that make it personal.
3 thoughts:
1) The average medical student debt upon graduation is $241,000, which makes your example less dramatic
2) If you follow Jim’s advice and live like a resident, you pay off your debt in 2-3 years. Which reduces the difference even more.
3) Most importantly, you did not take into account inflation. Normally not a huge deal, but for the next year it is a huge deal. Right now the extension is 4 months, but I believe there is ZERO chance loan payments will restart just before an election, so now we are looking at a 7 month extension (May – Nov). And if the Democrats do poorly in the election, the motivation to restart loan payments goes down again.
I am not educated enough to do the math on a 7 month inflation factor when factored into a 5 year loan, but by my calculation,7 months of inflation at 7% reduces the present value of the $350,000 loan to approximately $337,000. At this point I used the same loan calculation you did at this point (really should be done factoring inflation over the entire life of both loans with the 7 month delay incorporated, but my math skills are stretched too thin), it saves you $4,858 to delay paying 7 months vs starting to pay today, even with a 1% higher rate.
Of course, lots of factors to “estimate”, so it is definitely a personal decision based your risk tolerance, loan size, pay down plan, etc.
S,
You definitely raise some good points about a shorter pay down term 2-3 years and the amount borrowed from med school. I’ve definitely been meeting with lots of docs lately that borrowed more ($350-$400k) than the average debt size and feel that audience needs to see how these numbers shake out.
I could also be dead wrong about interest rates going up 1%. They could be flat next year or go up 2%, 3% or more. There are lot’s of estimates in here.
Bottom line, don’t delay on making a plan to tackle your loans and get started on those retirement accounts.
Andrew StudentLoanAdvice
Agree it is complex with lots of estimates and 100% agree with making sure you have a plan (loan and retirement). My biggest point was you can’t ignore inflation. This gets even more and more important the shorter time frame you plan to pay your loan off.
Could there be a chance that instead of forgiving student loans (as has been batted around in Congress) that there is just a perpetual extension of this policy? I have heard before, “I doubt this will be extended again.”
With inflation so high, if I had direct federal student loans, I may just wait and see how it plays out before I paid another dime (I consolidated my loans back in 2005 and don’t have this option).
I think another year is entirely possible. Since some are predicting a recession next year, that adds on another year (if it happens). Will the winner of the 2024 election restart them? If she or he is a first term President and the country is not doing exceptionally well, why would they? So I think it is distinctly possible this goes on for several years. What I would do is have a side fund when you graduate residency and act like you are paying them off. When interest/payments restart then you deposit the large sum just before that happens. Maybe you even are able to pay them off.
Bottom line, if you are looking to short term pay them off (5 years or less), the math seems to say don’t pay them off yet.
I had this exact same thought. Makes zero sense IMO to refinance right now. Only thing that makes sense is making student loan payments to yourself (whether a brokerage account or even just high yield savings account), then throwing the lump sum at the loans when repayment and interest begins. This shifts the numbers quite a bit, especially if they keep bumping the restart date.
AnAttending,
I do think they will push them back from September to January but speculate at this point it won’t be past that point.
They just raised interest rates 1/2% on Wednesday. Rates are definitely on the rise with multiple other raises anticipated this year. Would still plan to be refinancing federal debt soon if you’re planning on doing a long term pay down plan (15-20 year). I wouldn’t want to be stuck refinancing my loans at 5% if I could get 2-3% right now.
Also, I’d leave out 10k of the refi as there’s a chance it gets paid off through the widespread loan forgiveness.
Andrew SLA
After a half dozen extensions, I think just about anything is possible.
Perhaps a follow up post could be one about the chances of student loans getting forgiven?
I’ve been an attending for a few years and have paid down my loans a bit by myself but mostly by a very generous student loan forgiveness program. My loans have gone from 200k to about 45k and I’ve been investing six figures a year into low expense ratio mutual funds as an attending even as a lower paid doc.
I don’t pay off my loans right now since they’ve been at 0% for 2 years and also due to the chances of 10,000 being forgiven. I don’t think it’s good precedent but also don’t want to lose out on partial forgiveness of my debt.
Not sue what we would say. I mean, how would you determine those chances? Liberal senators talk about $50K being forgiven. President Biden talks about $10K but doesn’t feel like he has the authority to do it. Most of Congress doesn’t seem willing to do any forgiveness. What else is there to say? Who knows what Congress will do? But I prefer to control my own destiny and it appears you do too.
Askerofthings,
Only thing I would add is there’s an extremely low chance this type of “widespread forgiveness” is going to benefit high earners, most of the readers here. High earners would probably be phased out of this forgiveness. Definitely don’t plan on it right now. And, even if there was, 10k isn’t enough money for you to change your plan.
Andrew SLA
The fact that the pause on payments has been extended so many times is also having a bit of a side effect, as noted in many reports. People not making hundreds or thousands of dollars are spending that amount on homes, cars, cryptocurrency, or other things they may not have done if they were back to paying their debts. Will be interesting to see the ripple effect if any when payments resume.
You would have to be insane to pay off student loans right now. Biden’s support among young voters has tanked and the White House today said he would decide about that by end of summer. Translation: he’ll throw them a bone of loan forgiveness before midterms guaranteed. Sure, it could be means tested, but you’d be crazy not to wait a few months to see what happens.
Insane? Crazy? I wouldn’t go that far. It’s not unreasonable to wait given rates are 0% right now, but at a certain point, it’s just nice to get debt out of your life. I wouldn’t count on any more than $10K of forgiveness out of President Biden (the most he’s ever talked about), but my understanding is he doesn’t even think he’s allowed to do that.
Schumer just came out today saying Biden is moving forward. There will definitely be loans forgiven in some form to try and rally the 18-34 group that Biden has tanked in before midterms. Certainly makes sense to wait and see what happens because it’s guaranteed if you pay them off you won’t get refunded.
I’m not sure that’s quite what he said:
https://thehill.com/news/senate/3266646-schumer-white-house-closer-to-cancelling-student-debt-than-ever-before/
“More open to it” is hardly the same as “Biden is moving forward” and “definitely be loans forgiven”.
Schumer and Senate liberals have been for this for years. Democrats have controlled The White House, the Senate, and the House now for over a year and there has been no forgiveness. They are likely to lose at least one part of Congress at the end of this year. They better get a move on if they’re going to do it.
Headlines 3 months ago said pretty much the same thing.
“While payments and interest are on hold, each of these months will count as credit toward your forgiveness track even if you’re not actually paying any money”
Could you clarify this? If I understand you correctly, I don’t have to opt-in to anything or pay at all, each of these months is going toward the 120 on-time “payments” for PSLF?
You are enrolled in an IDR, right? If not, I would do so. Right now even forbearance counts though. Crazy stuff.
Matt B,
As long as you are enrolled in an IDR plan now and working full-time at a qualifying employer then all of these months during the loan holiday will count as credit towards the 120 required for PSLF.
Andrew SLA