Some student loan borrowers are months closer to forgiveness

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The payments of the federal student loan have been suspended interest-free since March 13, 2020 as part of the coronavirus aid. The deferral was extended to September 30, 2021. If the break is not extended again, the borrowers have a 19 month grace period on their loans.

Most borrowers will resume payments exactly as they did when the forbearance began. But some will be 19 months closer to running out of payments at all.

Each month of the forbearance counts toward the 120 required for public service loans or PSLF and toward the amount required for the earnings-based repayment waiver – 240 for student debt or 300 for graduate debt.

This means that borrowers who seek forgiveness will continue to be forgiven on the original schedule, but have paid less over time.

How much less depends on many things.

Who can benefit?

Nineteen months with no payments will only save you money if:

  • They track public service lending.
  • You are seeking income-based repayment waiver and your payments are low enough that when you receive the repayment, you will not have paid back your loan.
  • You have a standard or tiered 10-year repayment plan and use the interest-free time to make additional payments to your principal, saving you money on interest.

If you can be forgiven, the monetary value of the break for an individual borrower will depend on where you are in your payment cycle and how much your payment amount is, which is determined by your income. Here are some scenarios that show what it could do for borrowers pursuing PSLF or income-driven payment waiver.

How Much Public Sector Borrowers Could Save

For example, let’s say you’re a 2019 graduate who never made a payment for your $ 27,000 federal loan before the 2020 payment hiatus.

But before the break, you got a full-time job with a qualified public sector employer. They plan to pursue PSLF and are enrolled on an income-based repayment plan when necessary. We assume that over time your salary will increase at a rate of 3.2% over 10 years of repayment. You should make your first payment when the March 2020 hiatus began.

If your loans are waived after 10 years, you can save on the following if you fail to make 19 month payments (depending on potential income):

  • $ 20,000 income: $ 1,098 saved.
  • $ 30,000 Income: $ 3,176 Saved.
  • $ 40,000 Income: $ 5,254 Saved.

For example, suppose the same employment scenario is true, but in this case you have large federal student loan debt – $ 129,500 – that you accrued for both undergraduate and graduate studies. But that advanced degree helped you get a job with a higher income. Again, we assume that you will remain in the public service and that your income will increase by 3.2% over 10 years after receipt of payment.

If your loans are waived after 10 years, you can save on the following if you fail to make 19 month payments (depending on potential income):

  • $ 70,000 Income: $ 11,489 saved.
  • $ 80,000 Income: $ 13,567 Saved.
  • $ 90,000 Income: $ 15,645 Saved.

Savings on an income-based plan are not guaranteed

Forgiveness takes much longer if you are not employed in a qualifying public service position. An income-oriented repayment plan could still save you money – if you don’t pay off your debt before forgiveness.

For example, let’s say you’re a 2019 graduate who never made a payment for your typical $ 27,000 federal undergraduate loan before the 2020 payment hiatus. You work and are enrolled in the most widely used income-based repayment plan, Revised Pay As You Earn. Under REPAYE, if you’ve used undergraduate loans, your payments will be waived after 20 years.

In this example, you should make your first payment when the break starts in March 2020. As in the other examples, we assume that over 20 years of repayment your salary will increase by 3.2%.

If your loans are waived after 20 years, you can save as much (depending on your potential income) if you don’t make 19 month payments. It is important to note that if your income increases, you may pay off the loan before it can be waived:

  • $ 20,000 income: $ 2,636 saved.
  • $ 30,000 Income: $ 5,484 Saved.
  • $ 40,000 Income: Nothing Saved. You paid off your debt in 151 months (12.5 years).

For example, suppose the same employment scenario is true, but in this case you have both student and college debts making your total debt $ 129,500. You now have a higher income, which we expect will also increase by 3.2%, and you will pay back 25 years (300 month repayment period for postgraduate studies).

If your loans are waived after 25 years, if you fail to make 19 months of payments, you can save:

  • $ 70,000 Income: $ 20,275 in savings.
  • $ 80,000 Income: $ 23,609 in savings.
  • $ 90,000 Income: No Savings. You paid off your debt in 269 months (22.4 years).

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Anna Helhoski writes for NerdWallet. Email: [email protected] Twitter: @AnnaHelhoski.

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