Now that Democrats control Congress, President Joe Biden’s proposal to forgive a chunk of borrowers’ outstanding debt looks likelier than ever.
However, it’s important to understand just how far Biden’s debt relief would go. Biden’s campaign platform called on Congress to “forgive a minimum of $10,000 per person of federal student loans.”
Americans owed $1.7 trillion in student loans as of Sept. 30, according to the Federal Reserve. That total included $1.5 trillion in federal student loans issued by the U.S. Department of Education, and an additional $140 billion to $200 billion in loans from private lenders.
The Biden Emergency Action Plan to Save the Economy specifically identifies only federal student loans, not private loans. However, it’s possible that Congress could broaden the benefit to borrowers with private student loans.
Biden’s proposed $10,000 in forgiveness would retire all the debts of fully a third of student loan borrowers, says financial aid expert Mark Kantrowitz.
Although it’s unclear if you will get federal relief from your private student loans, here are three ways to handle your post-pandemic finances.
Strategy 1: Pause payments on federal loans, accelerate them on private loans
If you’re struggling to make your student loan payments, Biden already has offered some relief. In one of his first official acts, Biden paused collecting payments on federal student loans through September.
That means you can stop paying on your federal student loans with no penalty (although you’ll want to keep paying them down if you can).
If you have both federal and private loans, it might make sense to stop paying federal loans and speed up payment of your private loans, Kantrowitz says.
Because private loans typically carry higher interest rates than federal loans, this strategy will reduce your interest burden over time. What’s more, private loans generally carry less generous terms around forgiveness, so you should prioritize paying down the money you owe to private lenders.
Strategy 2: Refinance your private student loans
“It’s a great time to refinance your student loan debt,” says Steve Muszynski, founder and chief executive of Splash Financial, a student loan refinancing marketplace. “Rates are near all-time lows.”
Refinancing lets you pay off your old debt and roll the balance into a new loan, ideally one with a lower interest rate. Splash Financial is advertising student loan refi rates below 3 percent.
However, you’ll need pristine credit to qualify for a rock-bottom rate. Rates on private loans can range as high as 11 percent, Kantrowitz says.
Strategy 3: Request forbearance
If all else fails and you can’t make your payments, try calling your private lender and asking for forbearance, which is a pause on payments.
“If for whatever reason you don’t qualify with a refinance provider and you want to pause your payments with your existing lender, you should give them a call and request a forbearance plan,” Muszynski says. “While it’s likely that interest will still accrue, you’ll be able to take a break from your payments.”