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Wednesday, July 17, 2024

What to know about the current state of student loan debt

What to know about student loan debt (and tips for making payments)


Student loan payments, which were paused at the beginning of the COVID-19 pandemic, are set to resume in October. For many, this could feel like a tremendous financial burden as student loan debt in the U.S. continues to reach record levels, now the second-largest type for families behind home mortgages.1 Overall, the average borrower owes almost $30,000.2

Keep in mind that this payment pause is separate from the U.S. Supreme Court’s ruling on President Joe Biden’s student loan forgiveness plan, which would’ve wiped out up to $20,000 in loan debt for qualified borrowers.

With everything happening in the world of student loan debt, it can be hard to keep up and even harder to understand. Here’s what to know and how it may impact your financial situation.

What’s the Supreme Court’s ruling on student loan forgiveness?

Unveiled in August 2022, the forgiveness plan would've wiped out up to $20,000 of federal student loan debt for Pell Grant recipients and also forgive $10,000 for other eligible borrowers. If enacted, the move itself would’ve completely erased the balances for nearly 14 million individuals while reducing the country’s outstanding education deficit from $1.7 trillion to $1.3 trillion.3

The proposed plan applied to qualified Americans who earn under $125,000 per year individually or married couples who earn less than $250,000.4

However, the Senate recently approved a resolution to strike down the plan,5 and facing an array of legal challenges from lawmakers and politicians, Biden’s proposal also went to the Supreme Court, which issued a ruling on its legality on June 30, 2023.

In a 6-3 decision, the Court struck down the plan,6 and borrowers are once again responsible for their remaining balances with payments set to resume two months after the official ruling.

Options for paying off student loan debt

With the Supreme Court giving Biden’s forgiveness plan a thumbs down, many people will soon begin paying off their student loan debt. And for most Americans, loan payoff is at the top of the money to-do list, with nearly 55% of people believing financial freedom starts with being debt-free.7

If you fall into this group, you don’t have to hit the panic button once your payments are due again. Here are five things you can do to start preparing for student loan repayment.

1. Figure out how much you owe (and to what servicer)

It may have been a while since you’ve checked in on your federal student loan account. If you’ve graduated since loan repayments were paused, you may never have checked it.

The first step to preparing for loan payments to start again is to figure out exactly how much you owe. You can use the government’s free resource for learning about repayment based on where you are in the process. And while the amount you owe might seem daunting, it’s better to face the issue head-on and look at the big picture.

Also, be aware that several larger student loan servicers have exited their contracts with the Education Department. This means your loan may have been transferred to a difference servicer. If this applies to you, you may have to create a new log-in, update your personal information, and re-enroll in autopay.

Tip: If you’re unsure if you’re servicer has changed, or don’t know your servicer, consider using the portal.

2. Determine your monthly payment

After figuring out the total amount you owe, the next step is to figure out what your monthly payment will be. Your monthly payment will likely depend on the total amount you owe, the term (how much time you have to pay it back), and the interest rate of the loan.

3. Make room in your budget

Never had a budget before? It may be time to build one.

Have a budget but need to incorporate your student loan repayments? It’s time to do some updating.

Here are some tips for building a budget:

- Deep dive into your deposits, income and transactions so you can develop an understanding of your monthly income vs. monthly expenses. Knowing your spending and saving habits and understanding where your largest “hot spots” are, is a great springboard for getting a handle on your household budget.

- Determine a realistic monthly budget number. One type of budget you might want to consider is the 50-30-20 budget: a percentage-based approach designed to make it easy for you to allocate certain percentages of your income to “buckets” (needs, wants and savings).

Remember, if you can’t devote 20% of your household income to savings right away, don’t let that stop you from adopting a percentage-based budget like the 50-30-20 budget. Start off with a savings percentage that’s realistic for you and adjust the formula accordingly. For example, a 60-30-10 budget might work better for you now, with the goal of gradually building your savings up to 20% over time.

4. Build up your emergency fund

Once payments resume, student loan borrowers who did not make payments during the pause are going to have less disposable income available in their budgets. As a result, less money will be available to put toward other financial goals and financial emergencies that may come up.

Now is the time to make sure you have a healthy emergency fund in place. Most financial professionals recommend saving enough to cover 3-6 months of expenses.

5. Explore your options for support

- The government offers several income-driven repayment plans designed to help low-income borrowers avoid defaulting on their loans. There’s a loan simulator on the federal financial aid website to help you determine what your payments would be under different payment plans. If you’re ready to apply for an income-driven plan, you can request it through the Department of Education website.

- You may also benefit from consolidating your loans. This process combines multiple monthly bills into one, potentially making it easier to stay on top of repayments. (Note that consolidating can sometimes result in losing any credit you’ve earned toward forgiveness programs like Public Service Loan Forgiveness).

- If you have a retirement plan through Empower, you may have access to additional resources designed to help with your specific situation. Check out the Empower Student Debt Solution for services and tools like college planning, auto-payments, and gamified repayment – a way to make loan payments using cashback from everyday purchases.

- If you feel your interest rate is simply too high, you can also try refinancing your loans through a private bank. (See below for more information.) If you do so, you’ll lose the protections that come with federal loans.

- If you can’t afford to make payments at all, then you can request deferment or forbearance of your loans. Both deferment and forbearance allow you to request a student loan payment pause due to financial hardship. But they’re typically used in different circumstances. Depending on the type of loans you have, interest may accrue while your payments are paused and will capitalize when your payments resume if you don’t pay it off first. If you do apply for forbearance or deferment, be sure to make your loan payments until your request is approved so your loans don’t go into delinquency or default.

Refinancing student loans

When you sign on the dotted line for your student loans, you agreed to a slew of conditions — most notably, that you’d pay that money back over a certain period. But nothing lasts forever, does it? In fact, just like with your mortgage or car loan, you may be able to change the terms of your deal.

If you still owe money on your student loan, refinancing may help improve your overall financial picture.

Here’s why refinancing may be right for you:

- Get a lower rate. If interest rates are lower now than they were when you took out the loan, you may be able to get a better rate. Doing so can save you a substantial amount of money over the life of the loan.

- Drop your payments. Depending on the offer, your new loan may give you a lower interest rate or a longer term — or both, which can reduce your monthly payment.

- Simplify your finances. When you’re paying off student loans, you’re often dealing with several different lenders. That can be a big hassle, especially if you encounter any confusion or need to ask a question. By consolidating your loans into one, you can make your life easier and alleviate any headaches, too.

- Cut your co-signer free. Relationships change. There may come a day when your co-signer no longer wants to be on the hook for your student loans, and refinancing gives you a chance to let them off the hook.

Of course, refinancing may not make sense for you. If you have loans and an income-driven repayment plan, it may not offer the same benefits. Plus, not everyone is eligible to refinance their student loans. In general, you’ll need a good credit score and a reliable source of income to qualify. As with all loan-related decisions, it’s critical to read the fine print so you understand all the terms and conditions.

The bottom line

As you prepare to make student loan payments, now is the time to continue (or start) smart money management. If you’re not sure on how to proceed with your student loan debt, you may benefit from speaking with a financial professional.

1 CNBC, “Student loan debt hits another record high despite payment forbearance,” May 2022.

2 Forbes, “2023 Student Loan Debt Statistics: Average Student Loan Debt,” February 2023.

3 NPR, Biden is canceling up to $10K in student loans, $20K for Pell Grant recipients,” August 2022.

4 CNBC, “What’s at stake — by the numbers — as Supreme Court weighs student loan forgiveness,” March 2023.

5 Washington Post, “Senate rejects Biden’s student loan forgiveness program,” June 2023.

6 AP News, “Biden says ‘this fight is not over’ after Supreme Court kills student debt relief plan,” June 2023.

7 Empower, Money Talks, January 2023.

The Empower Student Debt Solution is provided by Candidly, which is not affiliated with Empower Retirement, LLC or its affiliates.


Vance J Rusley, CFP®, ChFC®


Vance Rusley is a Senior Manager, Advisory and Planning at Empower. A Chartered Financial Consultant and CERTIFIED FINANCIAL PLANNER™ professional, he is responsible for helping clients achieve their financial goals.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. No part of this blog, nor the links contained therein is a solicitation or offer to sell securities. Compensation for freelance contributions not to exceed $1,250. Third-party data is obtained from sources believed to be reliable; however, Empower cannot guarantee the accuracy, timeliness, completeness or fitness of this data for any particular purpose. Third-party links are provided solely as a convenience and do not imply an affiliation, endorsement or approval by Empower of the contents on such third-party websites.

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