Here’s what you need to do before the student loan payment break ends

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  • The suspension of federal student loan payments has been extended one last time until December 31, 2022, and capitalized interest will be suspended until July 1, 2023.
  • Until then, there are three smart steps you can take to reduce your student loan balance.
  • One expert recommends paying off unpaid interest and putting as much money into your student loans as possible.

As part of his student loan forgiveness plan, President Biden announced in August that student loan payments would resume on January 1, 2023, but interest will not capitalize on federal student loans until July 1, 2023.

Capitalized interest is unpaid interest that is added to your principal balance, usually after a period of forbearance or some other type of non-payment. You are then charged interest on this new higher balance rather than the original amount you borrowed. This is why you may find that your student loan balance is higher now than when you first took it out.

To lower your balance as much as possible before payments and capitalized interest resume, student loan expert Sonia Lewis, who has helped more than 20,000 clients navigate federal student loans through courses at The Student Loan Doctor , recommends doing three moves.

1. Don’t refinance your student loans

If you refinance your student loans with a private lender, you will not be eligible for Biden’s student loan forgiveness. But, says Lewis, “what’s going to happen is the commercial market is going to be really competitive and trying to get people to refinance.”

Resist the temptation, Lewis says, adding, “I think of all the people just before the pandemic who swapped their loans with a federal lender, and now they have no protection. They’re not going to get any of that money. from Biden. Don’t quit your lender.”

2. Make payments before the break ends

With student loan interest rates set at 0%, you have the opportunity to reduce your principal balance before interest rates go back up in 2023. So, says Lewis, start making payments now if you can.

“As it was during the pandemic, if you could invest money in your student loans, it would improve your credit rating significantly, because it would essentially become an installment loan,” she says.

3. Repay your unpaid interest before July 2023

Right now, it’s a good idea to pay off your unpaid interest — or pay off as much as you can — so it doesn’t get capitalized in July.

To do this, log into your federal student loan account and find out how much outstanding interest you owe, or call your lender to find the exact number, then make a plan to pay it off.

Here’s how $1,000 of unpaid interest, for example, can affect your student loans:

  • After a forbearance or deferment period during which you have not made any payments, the unpaid interest is capitalized or added to the principal balance of your student loan.
  • If you owe $10,000 with an interest rate of 5% over 10 years, you will pay a total of $2,728 in interest over the life of the loan.
  • If you add $1,000 to your main balance of $10,000, you’ll end up paying $4,001 in interest over the life of the loan.
  • Paying $1,000 now while capitalized interest is suspended will save you $1,273 over the life of the loan.

Says Lewis, “If I could go into everyone’s piggy bank right now, I’d throw some of that money at their student loan debt.”

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