How to take advantage of the extended student loan moratorium
How to take advantage of the extended student loan moratorium

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Marielle Tomlin took advantage of the student loan repayment freeze to pay off more than $50,000 in student loan debt. And she’s thrilled to have an extended opportunity to continue to reduce her student debt.

The Biden-Harris administration extended the pause on payments, interest, and collections until August 31, 2022. The latest freeze gives Tomlin, and millions more with student loansa new reprieve from the weight of the monthly payments.

Now is a great time to take advantage of the extra financial flexibility, but don’t count on it being a permanent situation, as experts don’t think a blanket student loan forgiveness is likely. .

Not having to pay interest energized Tomlin and allowed him to speed up the repayment of his student debt of more than $170,000. This motivated her to keep paying more, she says. Tomlin started paying $500 a month and kept going up from there, funneling much of the money she earned from her practice as a midwife into her student loans. “I kind of feel like I’m racing against time until the [no interest period] and the break is over,” she said.

If you’re taking advantage of this student loan freeze, here’s what you need to know about the break and how to take advantage of it.

There’s a ‘fresh start’ for those struggling to make payments

During the student loan payment freeze, borrowers who were in arrears saw all collections suspended. With this latest extension, it is expected to help borrowers in arrears by eliminating defaults and defaults on loans. This is a big problem that will allow somewhere approximately 8 million borrowers essentially make a fresh start, says Adam S. Minskylawyer specializing in student loan law.

At this stage, the government has yet to provide details on what it will look like and how it will work. Once this plan is implemented, it could be a boon to borrowers’ credit scores, dramatically improving the odds of qualifying for a mortgage or getting a lower interest rate on all types of loans.

However, what we do not know is whether or not changes in delinquency or default status will be automatically reported to the credit bureaus. If the government does not issue an automatic correction of your credit report, borrowers can defend themselves by writing dispute letters to their servicing agent and credit reporting bureaus, says Catalina Kaiyorawongsco-founder of the student debt financial wellness platform LoanSense. “In some cases, your credit score can be increased by more than 100 points,” she says.

How Experts Recommend Approaching This Payment Freeze Extension

Having flexibility with your student loans and not having to worry about accrued interest gives you some options. “The first thing I would want this person to ask is how can I get the most out of this?” says Anna N’Jie-Konte, financial advisor and founder of Dare to dream in financial planning.

Here’s what the experts are saying about what you need to know about the student loan repayment freeze and the strategies to take advantage of it.

Don’t rely on global loan forgiveness

You may have extra wiggle room in your budget right now, but experts say you shouldn’t make long-term financial decisions based on that. You don’t want to commit to paying a higher mortgage when you’re saving $100 or $1,000 a month by not paying off your student loans because “it suddenly becomes a problem once those [student loan] payments are restarting,” says N’Jie-Konte.

Experts we spoke to believe full forgiveness of all federal student loan debt is unlikely to occur. There may be some form of limited relief or expansion of existing programs, but even that is up in the air. ” I do not think so [Biden’s] going to erase everyone’s student loan debt, but there could be some sort of broader student loan forgiveness initiative,” Minsky says. “The administration has confirmed that this is still under review.”

The Public Service Loan Cancellation Program (PSLF) has already been revised to allow more borrowers to qualify. For those in eligible public service employment (teacher, firefighter, nurse, etc.), a wider range of federal loans and repayment plans will count toward PSLF requirements. If you qualify, you will need to request this limited waiver by October 31, 2022.

Boost your other financial goals

Now could be a good time to save for a down payment for a house, jump-start your child’s college fund, or pay off high-interest credit card debt. “I had a client I think paid off $50,000 in credit card debt over the past two years,” N’Jie-Konte says. She has also seen people use the extra money as seed capital for a business. “I think a lot of people use it to fund their dream projects.”

Tomlin is taking advantage of this interest-free period to pay off its school loans quickly. Once she has paid off her student debt, she will be free to work less or expand her midwifery practice by hiring another midwife. “I will be much more flexible once my loans run out,” she says.

Understand its impact on obtaining a mortgage

Any debt will limit your ability to qualify for a mortgage and reduce the amount you can borrow by increasing your debt-to-income ratio (DTI). But student loans have a unique and complicated relationship with your mortgage application.

If your student loans are in repayment, then your monthly payment amount is reflected in your DTI. This is true even if you have lower payments because you are taking advantage of an income-based repayment (IDR) plan.

However, the calculation changes if your payment is zero, which is currently the case for many borrowers. Many borrowers automatically assume because they don’t pay it, that the lender won’t count it, and that’s far from the truth, Kaiyoorawongs says. In this scenario, a percentage of your student loan balance counts toward your DTI. This percentage varies by loan type, but is generally 0.5% to 1% of your total loan balance. This means that for some borrowers, not having your student loans in repayment status can actually hamper your ability to buy a home.

For an FHA loan, the maximum DTI is typically 43%, a family earning $6,000 a month could have up to $2,580 in monthly debt payments (including the future mortgage payment). If this family has $100,000 in student loans and the loans are currently unpaid, then 0.5% of the loan balance counts toward their DTI, which would be $500.

In this scenario, the family might be able to increase their purchasing power by putting their student loans into active repayment. If they qualify for an IDR plan with a payment of $250 per month, here’s what it would look like for a 30-year loan with a 5% mortgage rate:

Student Loan DTI Impact Maximum mortgage payment Maximum mortgage amount at 5% over 30 years*
With $0 payout $500 $2,080 $345,200
With IDR $250 $2,330 $386,700
*According to the NextAdvisor Mortgage Calculator

It may seem counter-intuitive, but by restarting student loan repayments, some borrowers may increase their home-buying budget. And once you’ve closed the house, you can still take advantage of the federal student loan repayment freeze. “You just have to pay [student loans] for a month. You can pause again,” says Kaiyorawongs.

Whether or not this strategy works for you depends on your personal situation. You can apply for IDR at studentaid.gov.

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