Savanna Hoffman
The coronavirus pandemic has brought about a financial crisis for many, and student loan borrowers are no exception. With the average graduating senior in 2018 leaving college with $29,200 in student loan debt, the burden of student loans is a heavy one, even without a pandemic. The US government has waived interest on federal student loans and allowed borrowers to suspend payments for a period of time. However, this has also raised the question of whether borrowers should continue to pay off their student loans during the coronavirus crisis.
| Characteristics | Values |
|---|---|
| Interest on federal student loans | Waived |
| Student loan payments | Suspended for six months |
| Student loan debt | $1.41 trillion |
| Student loan forgiveness | Unlikely |
| Student loan relief | CARES Act |
| Student loan borrowers | 44 million |
| Student loan repayment | Contact loan servicer |
| Student loan forbearance | Up to 12 months |
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What You'll Learn
Student loan forgiveness
The COVID-19 pandemic has caused financial challenges for student loan borrowers in the US. While there is currently no widespread student loan forgiveness, the US government has provided some relief for federal loan borrowers. This includes a waiver of interest on federal student loans, a suspension of payments for two months, and a halt to debt collection for an eight-month period. These measures are intended to ease financial struggles and provide temporary relief. However, they do not address all loans, excluding private loans.
President Joe Biden has expressed support for direct student loan forgiveness of \$10,000 per borrower in response to the COVID-19 crisis. This proposal aims to provide financial relief to borrowers facing challenges due to the pandemic. Biden's plan also includes extending the federal student loan forbearance period, pausing interest accrual, and suspending debt collection activity. However, as of January 2021, student loan forgiveness was not included in Biden's coronavirus relief proposal, and it is unclear if it will be approved by Congress.
While waiting for potential loan forgiveness, borrowers can consider other options to manage their debt. One option is to continue making payments during the forbearance period, which can help reduce the overall debt burden by directly impacting the principal amount. Additionally, borrowers can explore income-driven repayment plans or seek forbearance from their loan servicers if they are facing financial hardship. It is important for borrowers to assess their overall financial situation and make informed decisions about their loan repayment strategies.
The impact of student loan debt can be overwhelming, especially during the pandemic. While loan forgiveness is uncertain, borrowers can take advantage of the current relief measures and explore various options to tackle their debt. Creating a solid plan and staying informed about government resources and stimulus packages can help individuals work towards their debt-free goals.
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Interest-free periods
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law in March 2020, provided federal student loan borrowers with an interest-free pause, or forbearance, on their loan payments. This meant that federal student loan borrowers were not required to make payments and saw no interest accrue during the relief period. The interest-free period was initially set to last until December 31, 2020, with rates for federal loans issued between July 1, 2020, and June 30, 2021, dropping to record lows at 2.75% for undergraduate Stafford loans. The CARES Act was extended multiple times, with the last extension coming on August 6, 2021, and the interest-free period was extended until January 31, 2022.
During the interest-free period, borrowers could still make monthly payments, even if they were less than the usual amount. This could potentially be advantageous, as any payments made during the forbearance would first cover any interest accrued prior to March 13, 2020, and then be directly applied to the principal. As a result, borrowers who continued making payments during the interest-free period could end up paying off their debt faster and saving money on interest in the long run.
However, it is important to note that the decision to continue paying off student loans during the interest-free period depends on an individual's financial situation. Those who are out of work or facing financial hardship due to the coronavirus may be better off taking advantage of the forbearance period to focus on paying for essentials or paying down higher-interest debt. Additionally, those who are likely to qualify for Public Student Loan Forgiveness (PSLF) in the future may not benefit from continuing to pay their loans during the suspension.
While the interest-free period provided much-needed relief for borrowers struggling to make payments during the pandemic, there were concerns about the potential for a messy transition back to repayment. Industry experts warned of a likely increase in delinquencies and defaults when payments resumed, and borrowers were advised to contact their loan servicers before the end of the forbearance period to confirm when to restart payments and enroll in income-driven repayment plans if needed.
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Emergency funds
Firstly, focus on covering the bare necessities. This includes paying your rent and utilities, covering other essential bills, and buying affordable food items to cook at home. While a streaming service may be beneficial for entertainment during social distancing, avoid paying for multiple subscriptions.
Secondly, consider your overall financial situation and any existing debts. If you have student loans, the federal government has provided some relief by waiving interest and allowing borrowers to suspend payments. This may free up some funds that you can redirect towards your emergency savings. If you are comfortable and can afford to continue making loan payments, doing so will help you pay off your debt faster, as the payments will go directly towards the principal.
Additionally, explore options to increase your income. You can look for safe opportunities to earn money, such as food delivery services or work-from-home gigs. If you have items you no longer need, consider selling them online.
Finally, if you are a freelancer, creative professional, or part of the LGBTQ+ community and are facing financial hardship, there are emergency grants and mutual aid funds specifically tailored to support you during this crisis. These funds provide assistance with essential expenses like rent, medical care, utilities, and food.
Remember, many experts recommend having emergency savings equivalent to 3 to 9 months' worth of expenses. During these challenging times, it is essential to prioritize your financial stability and well-being.
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Loan consolidation
The COVID-19 pandemic has significantly altered the financial landscape for many, and debt consolidation could be a smart move to help manage your debt. It is a process of converting different debts into a single loan, reducing the number of payments you need to keep track of. This approach can also lower the total amount you pay over time through lower interest rates and extended repayment terms. However, it is important to do your due diligence and create a solid plan before consolidating your debt. There is a potential that you might end up with a higher interest rate than what you’re paying now when the forbearance ends, which could leave you worse off in the long run.
If you decide to go ahead with debt consolidation, the initial step is to determine how much you owe and to which types of institutions. A financial advisor, credit counsellor, or bankruptcy lawyer can assist you with advice on how to make the best use of debt consolidation. They will help you understand the difference between secured debt and unsecured debt. Secured debt is attached to something you own, such as a house or a car, and failure to make payments can lead to foreclosure or repossession. Unsecured debt includes credit cards, personal loans, and student loans, and while there is nothing for the lender to repossess, they may sue and try to garnish your wages if you default.
There are several options for consolidating your debt, including a personal loan, a home equity loan, a cash-out refinance, or a balance transfer credit card. A personal loan can be an affordable way to consolidate debt, especially if you qualify for a low-interest rate. A home equity loan is a more affordable way to consolidate debt from an interest perspective, but if you fall behind on loan payments, you risk losing your home. Mortgage rates are extremely low, so doing a cash-out refinance may be more affordable, and many homes have risen in value lately, making it easier to squeeze equity out of your property. Applying for a balance transfer credit card may seem like an easy choice, but if you own property, a home equity loan could make more sense. It is important to weigh the pros and cons of each route to ensure your efforts to make your debt more manageable pay off.
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Repayment plans
The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 provided relief for student loan borrowers. The Act waived interest on federal student loans and allowed some borrowers to suspend payments for two months, with a further extension of four months. This suspension was automatically applied to federally held student loans.
If you are in a position to continue making payments, you can do so, and these payments will go towards any unpaid interest accrued before March 13, 2020. Once that interest is paid off, your payments will go directly towards the principal. This could save you money in the long run, as the overall sum will be reduced, and you may pay off your loan faster. However, if you are experiencing financial hardship due to the pandemic, you may want to take advantage of the forbearance period and redirect your money elsewhere.
If you are using an income-driven repayment plan, the suspension period still counts towards student loan forgiveness or public service loan forgiveness. You can apply to have your payments lowered during the suspension period, and you may be able to have your remaining balance forgiven under certain conditions.
The Department of Education has been urged to make it easier to enroll in income-driven repayment (IDR) plans and to implement automatic income recertification for IDR plans. IDR plans can provide significant financial benefits to borrowers, and the historically burdensome enrollment process should be streamlined to make these plans more accessible.
A new repayment plan introduced in August 2023 significantly reduced interest accrual and payments for certain borrowers.
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Frequently asked questions
This depends on your financial situation. If you can afford to make your regular payments, it could be beneficial to do so as you will save money on interest in the long run. However, if you need all your money for essentials or are worried about your job security, it may be best to take advantage of the student loan forbearance period.
The forbearance period refers to the time during which federal student loan borrowers are not required to make payments and interest accrual is paused. This was initially put in place due to the coronavirus pandemic and has been extended multiple times.
If you are facing financial hardship, you can contact your loan servicer to ask for forbearance or a reduction in your monthly payments. You may also be eligible for unemployment deferment if you have lost your job or had your hours reduced.
It is unlikely that there will be blanket student loan forgiveness. While politicians have discussed the possibility of loan forgiveness, there is currently no plan in place, and industry experts advise borrowers not to rely on this happening.
