How to capitalize on federal student debt pause
LOUISVILLE, Ky. (WAVE) - This week, the Biden administration extended the pause on federal student loan repayments.
While that’s welcome news for millions in debt, it’s not a permanent solution.
Federal student loan debt impacts millions across the country, and plenty in the Louisville area too.
Shelby Vandagrift just opened a new restaurant inside Logan Street Market. As she balances business expenses, she’s also balancing a bunch of student debt, including one federal loan. It all adds up to about $800 a month.
“Which is like, roughly what I pay for like my rent and utilities and gas included, so it’s about the same amount as my living expenses,” Vandagrift said.
“It’s a $1.6 trillion issue across the country,” Lamkin Wealth Management CEO Mark Lamkin said.
He said there’s a reason student debt has grown into such a problem compared to just 20 or 30 years ago.
“Things have changed,” Lamkin said. “We didn’t have a pandemic to deal with. I get the moral hazard of the government paying off student loans, and I empathize with that, but there are situations where it could be helpful.”
Currently, payments on federal student loan debt are frozen until the end of August. That debt could even be completely forgiven for some who work in certain industries in the public sector.
Lamkin said it may not be that simple.
“So the negatives of the student loan forgiveness is it’s 100 percent taxable,” he said. “So you can often get yourself in a bind if you had 50 to 60 thousand dollars worth of debt and it is forgiven? You’re going to owe taxes that year.”
He said the best way to tackle student debt during the current pause is to keep making those payments anyway, especially with the feds looking to raise interest rates several more times this year.
“So you’re possibly looking at one to two percent increase in interest rates over the next two years in your student loan, which can make hundreds of dollars worth of payments,” Lamkin said. “So if you’re making those payments now while you’re not being charged interest, paying that principal down directly, make it a plan.”
He suggested using an income tax refund or any raises to target that debt and get the most bang for your buck.
If someone is preparing to start those payments again this fall, there is some good news. The Department of Education is letting everyone start those back up in good standing. Even if a person had some delinquent payments before, they should not be penalized.
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