Amid rapidly rising interest rates, multiple extensions of the federal student loan payment pause and a controversial student loan forgiveness effort, 2022 has been a tumultuous year in the student loan space.
Many of those issues are likely to carry over into the next year. Here’s what to expect from your student loans in 2023, and how to manage your debt when the future is uncertain.
Will Student Loans Be Forgiven in 2023?
President Joe Biden announced in August an unprecedented student loan forgiveness program: Federal student loan borrowers earning less than $125,000 annually (or $250,000 if filing taxes jointly) would be eligible for $10,000 in loan forgiveness. Borrowers who also received Pell Grants in school could get $20,000 of debt erased.
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The announcement received mixed reactions. Many borrowers were thrilled with the opportunity to erase their debt, while others argued that it was too low of an amount to make much difference. Still, others contended that any loan forgiveness was unfair to those who didn’t go to college or have already paid off their school debt, and a waste of taxpayer funds.
As expected, the executive order for forgiveness has been challenged in court. Multiple cases are pending and the Department of Education has closed applications for forgiveness. However, more than 26 million borrowers have already submitted forgiveness requests, and 16 million applications have been approved and sent to loan servicers.
While no forgiveness can be processed until these legal matters are settled, at least two cases are now being appealed. The Biden administration has asked the Supreme Court to reinstate its forgiveness efforts, though it’s not clear how the court will respond or how long a final decision could take. The court could approve or deny the government’s request, or agree to hear arguments on an expedited timeline before issuing a more detailed ruling.
For its part, the Biden administration seems confident that loan forgiveness will eventually proceed; the administration began notifying borrowers that their forgiveness applications have been accepted. “Your application is complete and approved, and we will discharge your approved debt if and when we prevail in court,” said a recent email from Education Secretary Miguel Cardona to some borrowers.
Expect Student Loan Payments to Resume
In March 2020, former President Donald Trump instated a pause on nearly all federal student loan payments. That pause was extended several times by both Trump and Biden. In November, Biden announced that a final extension would be granted until no later than June 30, 2023.
The extension was granted to protect borrowers while the legal issues surrounding the student loan forgiveness plan are resolved. Payments will resume 60 days after the forgiveness program is allowed to proceed or the matter is otherwise settled in court. If no resolution is reached by June 30, payments will resume 60 days after that date.
Regardless of exactly when payments resume, borrowers should expect to restart payments in 2023. Consider the steps you can take now to ensure a smooth transition into making payments again.
Student Loan Interest Rates Will Likely Continue to Rise
Interest rates on federal, private and refinanced student loans have all increased in the past year, thanks to record-setting inflation and general economic turbulence. The Federal Reserve has influenced the student loan interest rate hikes by raising its federal funds rate six times so far this year. By doing so, interest rates across most types of lending have increased steadily.
It’s expected that rates will continue to increase in 2023. The federal funds rate is projected to range from 3.9% to 4.9% in 2023, according to the Federal Reserve; it currently sits at 3.75% to 4%. However, if inflation responds positively to the Fed’s measures, interest rates may not continue to rise much.
Federal student loan rates are updated annually in July. After an initial dip due to Covid-19, the rates have steadily increased over the last two years. Undergraduate student loans currently carry a rate of 4.99%, up from 3.73% in the 2021-22 school year.
Private student loan rates are updated much more frequently and have also trended higher in the past year. As of Nov. 14, rates on 10-year fixed-rate student loans averaged 7.76%, up from 6.40% a year ago, according to Credible. Rates on five-year variable-rate student loans averaged 9.06%, up from 3.53% a year ago.
Rising rates on any type of student loan affect borrowers who take out new loans along with those who already have variable-rate loans.
Should I Refinance My Student Loans in 2023?
For borrowers who’ve had their federal student loan payments on pause for nearly three years, there hasn’t been much incentive to refinance their debt. However, that could change with payments expected to resume in 2023.
Refinancing federal student loans has always been a complex decision, even before the pandemic turned the student loan market upside down. You might save money on interest, but you also lose all your federal benefits, including income-driven repayment and forgiveness opportunities.
However, refinancing private student loans is more straightforward. Because most don’t carry special benefits as federal loans do, there’s less to lose if you refinance.
Regardless of the type of student loans you have, it’s important to shop around and compare different lenders. Most borrowers refinance to a new loan that offers better terms, such as a lower interest rate or smaller monthly payment. Because 2023 is generally expected to be a high-interest market, it may be difficult to find a lender offering a lower rate in the near future.
However, refinancing may still be beneficial if you want to adjust your student loan repayment period or lower your monthly payment.