Don't Bank On Student Loan Forgiveness: Come Up With A Debt Reduction Plan Instead

Millions of Americans are waiting breathlessly for June when the Supreme Court of the United States will hand down its decision on whether or not the Biden administration has the legal right to implement the student loan forgiveness program. Nearly half of the 43 million Americans with student loan debt could have their federal student debt wiped out entirely under the plan, and 26 million people have already applied for debt forgiveness. However, after hearing two cases challenging the plan, it seems likely that the Court will block it. And because of court rulings, all the relief is on hold. The Education Department stopped taking applications in November because of legal challenges to the plan.

Things aren’t looking hopeful for the student loan forgiveness program that promised to erase $10,000 to $20,000 of your student loan debt. The good news is, the government is still pausing your loan payments for the foreseeable future. So, now is the time to get ahead of your debt, and get back into the rhythm of paying off your loans. Anything you pay now will reduce your total debt, since there’s no interest paid to the government. And, if the forgiveness program miraculously gets approved, you’ll get that money back.

Make A plan

Regardless of how the SCOTUS ruling shakes out, there are things that you can do to help reduce the amount of student debt you owe. First things first: If you’re already anxious thinking of the total amount you owe in student loans, stop. That’s not the number that matters, so you don’t need to feel so overwhelmed. Instead, calculate the real “minimum” number you need to know (and pay), so you can become debt-free quickly. 

The number you should focus on is your monthly payment. To calculate it, multiply your total loan balance times your annual interest rate. That’s your annual payment. Divide it by 12. Add $5-50 to it. That’s it. That’s your magic number. That’s what you have to pay, so you don't end up with more debt than you started with. 

Do The Math

Let’s say you have 2 student loans.

• Loan #1 total = $52,700, with an interest rate of 7.8%
• Loan #2 total = $19,433, with an interest rate of 6.2%

Pick one loan to start with, and plug it into the formula we just showed you: 

Loan #1:

• Total loan balance X annual interest rate = annual payment → $52,700 x 7.8% = $4,110.60
• Divide it by 12 → $4,110.60 / 12 = $342.55
• So, your total MUST PAY monthly amount for Loan #1 is $342.55.

If you have multiple student loans, add all your monthly payments for each loan at the end. We calculated Loan #2 for you already: your total monthly MUST PAY amount for both loans = is about $443 per month. So, in sum, $342.55 plus $443 per month – which is $785.55 per month – is your MINIMUM to pay off debt. If you can’t afford to pay that much, then interest rates will kick in, making it harder to pay it off quickly.

When Will Your Debt Be Paid?

• If you pay $400 / month – you’ll pay your debt in…never
• If you pay $500 / month – you’ll pay your debt in…30 years
• If you pay $700 / month – you’ll pay your debt in…14 years
• If you pay $1,100 / month – you’ll pay your debt in…8 years

See how much faster it is? Plus, since student loan payments are still on pause, so is the interest rate being charged. This means all of the cash you pay now goes directly into your actual loan, instead of disappearing into the “extra” added due to interest, which makes it the perfect time to make a significant dent. Even $50 can go a long way to paying your debt off faster. 

It’s worth noting that not all loans are eligible for the federal payment pause. First, only federal, aka government loans, are included. That leaves out loans from private banks like JPMorgan, Wells Fargo, and Sofi. Secondly, only certain types of federal loans are included. You can figure out which loans are truly paused by going to www.studentloan.gov.