The End of the Student Loan Pause: What You Need to Know

0:00Attention, everybody with federal student loans. Looks like September 1st is going to be the big day, meaning the day you start writing checks again. What's up with student loans? What's happening with the moratorium on repayments? What's happening with any plans for canceling student loans? We're going to dig into all of that in today's First Friday bonus episode. Welcome to the Afford Anything podcast, the show that knows you can afford anything but not everything. I'm Paula Pant, your host. Normally, we are a weekly show. We come out every Wednesday, though I'm kind of contemplating changing the day of the week.

0:39Sort of thinking about Tuesday, but that's neither here nor there. Normally, we come out every Wednesday. But once a month, on the first Friday of the month, we have a first Friday bonus episode. Today, the day that I am recording this is Friday, June 2nd, 2023. I just came back to afford anything full-time as of yesterday. June 1st was my first day back at work after completing a one-year fellowship at Columbia University. What a perfect time to start chatting about student loans. It's the beginning of June, the start of summer, and who doesn't like going into summer break thinking about the mountain of debt that you still need to repay?

1:22Woo! Okay, what is going on? First of all, the new debt ceiling deal reached by President Biden and by Congress have two major impacts on student loans. Number one, student loan repayments must restart on September 1st, 2023. So the moratorium on repayments is over. If you have student loans, you will once again be required to make monthly payments starting September 1st. Number two, it is less likely that any student loan debt will be canceled. It's still possible, but it is less likely. The debt ceiling deal includes language that prohibits the use of executive authority to cancel student loan debt.

2:11That's a fancy way of saying the president can't do it on his own. He's going to need buy-in from Congress. They'll have to pass legislation to cancel student loan debt. That makes it a lot less likely to happen. And that is why, if you've listened to some of our Ask Paula and Joe episodes, we've had a handful of callers who've wondered whether or not they should plan for the cancellation of student loan debt within their debt repayment strategy, right? Like, it's a natural question. You're juggling a car payment, a student loan repayment. You want to put money in retirement accounts. You want to save up for the down payment on a home.

2:49You've got all of these budgetary priorities that you're juggling. It's a logical question to ask, hey, there's so much news around the idea that student loans might be canceled. Should I just bake that in? And Joe and I have always said, abso-effing-lutely not. Never base your financial plans on what you hope the government might do. The deal's never done till the ink is dry on the contracts. And by the way, every time in my own life that I have not listened to my own advice and forgotten that the deal is never done until the ink is dry, every single time has come back to bite me in the butt.

3:31That's precisely the reason, and I say this from the school of hard knocks, that's precisely the reason why we've always said, don't base your plans on what might happen in the future. Base your plans on what is happening in the present. What is happening in the present is that there is no cancellation. And what is happening in the present is that the government has just reached a deal in which it is less likely that there will be cancellation. And so that means that if you have student loans, here are the things you need to do to prepare for the upcoming restart of student loan payments. First, take a look at the different repayment plans because there are multiple repayment plans available.

4:15Many borrowers may make the mistake of assuming that they're just going to pick up where they left off. But your finances, your income, your net worth, your other debts, your entire financial picture might look completely different today than it did in March of 2020 at the beginning of the pandemic when the payment pause on federal loans first went into effect. And that means the plan that you were in back then might not be the plan that you want right now. Now, when it comes to student loans, there are, broadly speaking, three categories of plans. There are fixed repayment plans. There are income-driven repayment plans.

4:58And then there's the worst-case scenario, last resort, which is requesting deferment or requesting forbearance. Now, if you're in an income-driven repayment plan, you'll be in a plan that's based on your income and the size of your family. And those income-driven repayment plans also allow for loan forgiveness, forgiveness of the remaining balance, after a predetermined length of time, assuming that you meet all of the criteria for that forgiveness. Now, I'm saying income-driven repayment plan, but actually inside of this umbrella category, there are multiple plans, plural, and the predetermined length of time varies depending on which income-driven repayment plan you're in.

5:44But typically, it's going to be about 20 years, sometimes 25 years, depending on your plan. So with an income-driven repayment plan, your monthly payments are calculated at anywhere between 10 % to 20 % of your discretionary income. And the phrase discretionary income in this context is defined as 150 % of the poverty level. And poverty level is calculated relative to the number of people in your household. So the poverty level for one person is different than it would be for a family of four or six. So under student loan income driven repayment plans, your income up to 150 % of poverty level based on your household size is non-discretionary.

6:31It's what you need for necessities. Anything above that, the government defines as discretionary. And between 10 % to 20 % of that discretionary income is what they'll charge you for the monthly payment on your student loan. And so you do that for between 20 to 25 years. And at the end of that time period, the remaining balance is forgiven. Now, if you were already in an income-driven repayment plan prior to the start of the pandemic, which means you were in one prior to when student loan repayments were paused, then the good news is all of that time, the last three years, have counted towards that 20 to 25-year timeframe.

7:13so you get credit for those paused payments as though you had paid in full and on time. Now, if you are in an income-driven repayment plan, you need to recertify your income and your family size every year. And so now that student loans are starting back up again, you're going to have to do this. Again, you're going to have to recertify your income and family size, but you don't have to do it right away. At the earliest, you will need to do this six months after September 1st. which is a very complicated way of saying that it will be at the end of February of next year. 180 days from September 1st is February 28th.

7:55And actually, technically, this is how the wording is so non-user friendly. Technically, student repayments don't start on September 1st. They start 60 days after June 30th, which is technically August 29. And that is a business day. It's a Tuesday. So feel free to mark your calendars for that day. But also know that colloquially, people are talking about the end of the pause on student loan repayments as happening on September 1st. That's the colloquial date in use. but I don't think there's any reason to split hairs. August 29th, September 1st, what matters, big picture, what matters is choosing the repayment plan that fits your budget and that's going to give you the best outcome.

8:46So if you were, so back to the different repayment plans that we've been talking about, as I mentioned, there are broadly speaking, big picture, income-driven plans and fixed payment plans. And then the third category is forbearance or deferral. If you were in an income-driven plan prior to the start of the pandemic, you will still be enrolled in that same plan. So while you do need to recertify your income level and your family size, you don't need to re-enroll in the same plan. You will automatically be kept in the plan that you were in prior to the pandemic. Now, if over the span of the last three years, your income dropped, or if your family size grew bigger, then you might want to recertify your income prior to February because that's probably going to lower your monthly payment.

9:41And so you can go online to do that. We will drop the link in the show notes to the exact website that you should go to in order to proactively update that information and lower your payment before they ask for that information next February. All right. So that's the deal on the income-driven repayment plan. Now, what about the fixed payment plans? Well, there are three different, under the category of fixed payment plans, there are three different plans. Under the standard plan, your payments are fixed and you make them for up to 10 years. If you have consolidated loans, you make them for between 10 to 30 years.

10:21Your maximum repayment period is going to vary depending on your total loan debt. So if you had less than$7 ,500 in total loan debt, your repayment period will be a max of 10 years. If by contrast, you had$60 ,000 or more, then your repayment period will be 30 years. And then there are graduated tiers in between depending on if your total debt is between $7 ,500 to$10 ,000, between$10 ,000 to$20 ,000, between$20 ,000 to$40 ,000, or between$40 ,000 to$60 ,000. It graduates 12 years, 15 years, 20 years, 25 years. Now, that's the standard plan. There's also the graduated repayment plan, which starts with lower payments, and those payments increase every two years.

11:04And this is actually a pretty smart setup for anyone who wants to be on a fixed payment plan, but also wants to account for the fact that straight out of college, your income in those first few years is likely to be lower. And 10 years out of college, your income is likely to be higher. So the graduated repayment plan, although it's a fixed plan, meaning it's not based on your income, it still starts out low and increases every two years, which indirectly mimics the expected experience that your income will grow over time. Now, under this plan, your repayment period will be between 10 to 30 years, depending on, again, your total education loan debt.

11:58And by the way, I should add the average borrower, and of course, averages are not great sources of data because averages can be quite skewed. But according to The Economist, the average borrower in the U.S. has$30 ,000 of debt. And according to The Economist, there are 45 million borrowers with currently outstanding debts. So if you are exactly average, if you have$30 ,000 of student loan debt, the repayment period under the standard plan or the graduated plan under both of those would be 25 years at maximum. Of course, you can always opt to pay it off sooner. Speaking of 25 years, that leads us to the third and final iteration of the fixed repayment plan, and that's called the extended repayment plan.

12:50As the name indicates, the extended repayment plan allows you to repay your student loans over an extended period of time. So it gives you the option of making lower monthly payments for a longer period of time. as compared to what the standard plan or the graduated plan offer. So stepping back and zooming out a little, if you have student loans, the first thing that you want to do is reassess all of these different repayment plans and decide whether or not you want to stick with the current repayment plan that you already have or you want to switch. There are calculators online that can help you figure out what some of the switching costs might be.

13:33And again, we will link to a lot of resources in the show notes. You can subscribe to the show notes for free, affordanything.com slash show notes. So we'll link to some calculators that can help you figure this out. But regardless of whether you choose to stay in the same repayment plan that you had pre-pandemic or to switch to something else, there are two things that you absolutely, no matter what, must do. Number one, opt in to an automatic payment plan. If you were on an automatic payment plan prior to the pandemic, you need to opt back in. Your payments are not going to automatically restart.

14:14So if you were signed up for auto pay, you are no longer signed up for auto pay. You need to go sign yourself back up for auto pay right now. Otherwise, you might mistakenly believe that you are automatically making payments and you're not. So that's very important. Number two, make sure that your student loan servicer has your updated contact information, your email, your mailing address, your phone number. We will link in the show notes to a website that can help you figure out who your student loan servicer is and how to access your account dashboard. Now, we're going to take a quick break for a word from our sponsors.

14:58And when we come back, I want to talk about how you can readjust your budget when you suddenly have to start making a big new monthly payment. So in this particular case, it might be that your student loan repayments are starting up again in September. But for other people, it might be that suddenly you have a big medical bill and you've negotiated to make monthly payments on it, but now you have this new monthly payment and there's nothing you can really do about it. Or maybe your kid needs braces and you weren't planning for that and you don't have orthodontia insurance and you're wondering how you can pay for that.

15:41Right? So what do you do when suddenly you have a big bill? And it's not a one-time bill. It's a chronic ongoing monthly bill. How do you make permanent shifts in your budget to deal with that? We're going to talk about that right after this break.

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19:43Welcome back. In this second half of the episode, we'll talk about what to do when you are suddenly and unexpectedly hit with a new monthly bill that you can't get out of. It could be that your student loan repayments are restarting again. It could be a medical bill that you have to pay on a monthly basis for something that's necessary. It could be that you have elderly parents or grandparents and you just learned that they are in financial distress and you need to start supporting them. Whatever it is, how do you make a dramatic and ongoing shift to your budget in order to accommodate this new reality?

20:30Here are a handful of tips. Number one, do not listen to the tired, unimaginative cacophony of voices in the personal finance space that continually chide you for eating avocado toast or going on the occasional Target shopping spree. People who lack both imagination and any knowledge of behavioral psychology, those people love to point their finger at discretionary spending. Why? Because it's salient. It's immediate. It's tangible. It's visceral. It's in your face. It's physically in your hands. So it's easy to see. And as a result, we love to scapegoat it. We scapegoat what is salient. When in fact, the occasional avocado toast, assuming you're going out to brunch twice a month at 25 bucks a pop, I mean, okay, great.

21:32That'll save you 50 bucks. But if you're trying to figure out how to suddenly cough up an extra 500 bucks a month, wonderful. Now you've given up one of your joys in life and you're only 10 % of the way there. No wonder people think that personal finance sucks. Instead, focus on the vampires, the invisible, non-tangible, non-visceral, non-salient, boring expenses that bleed money from you. Vampires include insurance premiums that are way too high. Could be your auto insurance, your renter's or homeowner's insurance. could be the AppleCare that you keep signing up for but never using. There are all types of insurances out there, and sometimes you sign up for the one that's the best deal at the time, five years ago, but the premiums have started creeping up little by little, and you haven't reassessed them because who the heck wants to spend their Friday night doing that?

22:37Literally nobody is like, you know, I have big Friday night plans, me and the spreadsheet. But if you're a homeowner and you're paying homeowner's insurance and you haven't stopped and reassessed what you're paying, the premiums that you're paying versus what else is there, it's a competitive market. Let that competition be to your benefit because an hour of shopping around for the thing, homeowner's insurance, that is so boring that nobody wants to shop around for it, that hour could save you substantially more money than foregoing a slice of toast ever could. So that's tip number one. ignore the finger pointing at the fun activities, which is where everyone's brain goes first.

23:26That's a cognitive bias. It's called the availability heuristic. We glob on to the first example that comes to mind and brunch comes to mind faster than our insurance policies do. So we latch onto the first answer, even though it's not the most efficient answer. Don't let yourself fall prey to salience bias, to the availability heuristic, to intellectual laziness. All right, that is tip number one. Tip two, if you need to side hustle in order to grow your income, remember that there are two different types of side hustles that you can pursue. There are the things that put an immediate hit of cash in your pocket, but they're not scalable in the long term.

24:14That's one category. That includes gig economy stuff, dog walking, pet sitting, driving for Uber. It's an immediate hit of cash in your pocket, but there are low barriers to entry, which means compensation is low. You're being paid for your time rather than for your skills, and you're not going to be able to scale this into anything bigger than a simple trading time for money. The gig side hustles are great for those moments in your life when your back's against the wall, the poops hit the fan, and you need to come up with 500 bucks by Friday. Absolutely 100 % go for the gigs. We've all needed to do that at multiple points in our life.

25:00Like, you do what you got to do. But if slash when there is no longer any urgency and you have the ability to build something scalable, know that it will be a slow start. It's like building muscle or losing body fat or learning a foreign language, right? It's going to be a slow start, but consistency over time yields big results. The first hour that you spend trying to learn how to speak Japanese is not going to turn you into a Japanese speaker. But the 700th hour that you spend doing it, which is one hour a day every day for two years, you're going to be pretty darn good at that point. No Matsubasho, but, you know, good enough.

25:48So if you need to side hustle in order to build extra income to meet this ongoing new bill, ongoing new monthly bill that you are facing, then embrace a combination of the two. Do the gig stuff to hold you over temporarily until you can build that slow burn that is much more scalable. And you'll know if it's scalable because you won't be trading your hours for dollars. you'll be selling your skills, your expertise, your vision, your design. It will be the business of you and it will be the intersection of the skills you hold and the solutions you can bring to the world. That's your zone of genius, right?

26:34The businesses that are scalable are the ones that are in your zone of personal genius. And that's very different than the businesses where you trade your hours for dollars, but trade your hours for dollars in the meantime as a stepping stone. You got to tread water before you can swim. So that's tip number two. And finally, tip number three. Let's take a step back and notice that the first tip dealt with saving money. The second tip dealt with earning money. And so this final tip is all about investing money. Because as you progress with tip number two, as your side hustle continues to grow, as you continue to scale, as you command higher and higher rates for your skills, your expertise, your vision, you will at some point, hit that wonderful spot where you are making more than that surprise monthly bill that you're now facing.

27:40You're making more than the$500 a month that you have to pay for your student loan repayments. And so your job is to take that entire surplus after taxes and invest, invest, invest. Pick your favorite asset and just get started. Index funds, rental properties, reinvesting back into your own business, investing in skills that can help you make more money. Take a class that teaches you how to negotiate, a class that allows you to do some role playing in negotiations so that you go into that meeting with your boss more prepared. or learn an ultra-specific niche skill in which, yes, you'll be selling your time for money, but you'll be doing so commanding a three-digit hourly rate or a four - to five-digit monthly retainer.

28:42All of those are investments, whether it's an index fund, whether it's real estate, whether it's developing new skills. Investing in yourself is a phrase that has become such a cliche that it has lost its true meaning. Investing in yourself is not feel-good consumerism. Investing in yourself is literally investing in the education, the knowledge, the training, the network building, and relationship building that is necessary to increase your likelihood of making more money. If it doesn't have a potential ROI, then it is by definition not an investment. Now that's not to say that there's anything wrong with feel-good consumerism, but don't conflate a desire with an investment.

29:39Know which is which and embrace both, but do so with your eyes wide open. Do so consciously without fooling yourself because when you do, you can then become clear about how much money you are actually investing and what kind of a return you are actually receiving in two years, five years, eight years. And if you invest wisely and consistently, then over the long term, you have a solid likelihood, nothing in life is ever guaranteed, but you have a solid likelihood of doing pretty darn well. So those are my three tips. Thank you so much for tuning in. This is the first Friday bonus episode of the Afford Anything podcast, recorded on Friday, June 2nd.