Ibrahim Gardner
The COVID-19 pandemic has had a significant impact on the finances of millions of people, including those with student loans. While federal student loan payments were automatically paused during the pandemic, private student loans are not subject to the same regulations. For those with federal loans, the decision to continue paying or not during the forbearance period depends on various factors, such as financial stability and income-driven repayment plans. Understanding the implications of any payment pause and managing debt during this time is crucial for long-term financial goals.
| Characteristics | Values |
|---|---|
| Federal student loans | Payments were automatically paused from March 13, 2020, until September 30, 2020, under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). |
| Private student loans | Not covered by the CARES Act; borrowers should check with their lender about forbearance options and understand the financial implications of any payment pause. |
| Impact of non-payment | No negative impact on credit; time added to the loan for the months without payments. |
| Reasons to continue paying | 100% of payments go towards the principal balance; faster payoff of the loan; staying in the habit of on-time monthly payments. |
| Income-driven repayment plans | Monthly payments can be reduced to as low as $0; non-payments count toward required payments for loan forgiveness, but income tax will be owed on the forgiven amount. |
| Public service loan forgiveness | Non-payments count toward the required 120 payments for forgiveness, and income tax is not owed on the forgiven amount. |
| High-interest credit card debt | It is generally recommended to prioritize paying off credit card debt with a higher interest rate over student loan debt. |
| Financial planning | It is advised to build an emergency fund, save aggressively, and work on a strategy to build credit and manage debt during this period. |
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What You'll Learn
Federal vs. private student loans
During the COVID-19 pandemic, the US government passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which provided relief for federal student loan borrowers. Under the Act, student loan payments were automatically paused from March 13, 2020, until September 30, 2020. This relief applied only to federal student loans and not to private student loans.
Now, let's delve into the differences between federal and private student loans:
Federal student loans are provided by the government, while private student loans are offered by banks, credit unions, and other financial institutions. Federal loans have borrower protections and not-for-profit repayment plans that private loans lack. Federal loans also have lower borrowing limits and fixed interest rates. Private loans, on the other hand, often provide a choice between fixed or variable interest rates. A fixed rate stays the same, resulting in predictable monthly payments, whereas a variable rate can fluctuate. Private loans also offer more flexibility in terms of repayment options, including the ability to make interest-only or fixed payments while still in school.
To apply for federal student loans, individuals need to complete the Free Application for Federal Student Aid (FAFSA). This application also determines eligibility for other federal student aid, such as grants and work-study programs. Private student loans, on the other hand, can be applied for directly through banks or other lenders, but it's recommended to first explore federal loan options before considering private loans. Private loans are considered riskier due to their lack of safety nets and potential impact on an individual's debt-to-income ratio.
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Pros and cons of paying during COVID
Pros and cons of paying off student loans during COVID-19
Pros
- If you have federal student loans, you don't have to pay during the COVID-19 crisis. However, if you can afford to, you can get ahead on your student loans and reduce your principal balance.
- During the coronavirus, interest charges are on hold. That means 100% of your payments will go directly towards the principal balance, helping you to pay off your student loans faster.
- Staying in the habit of paying your student loans will make it easier to keep paying when life gets back to normal.
- If you have an emergency fund and believe your income won’t be affected by the coronavirus, you may still want to make payments while your student loans are on administrative forbearance.
Cons
- If you have private student loans, you’re still required to make monthly payments and pay interest.
- If you take advantage of the pause in student loan payments, you will have more time added to your loan, and you will eventually have to pay the missed payments.
- If you refinance your federal student loan with a private lender, you will lose the benefits of a federal loan, such as loan forgiveness, loan assistance, and subsidized loans. You may also have to start making payments immediately.
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Pros and cons of not paying during COVID
Pros and cons of not paying student loans during COVID
Pros
- You can save money and pay off other high-interest debt: The temporary 0% interest rate on federal student loans during the pandemic means that you can save money by not paying off your student loans. This money can be used to pay off other high-interest debt, such as credit card debt.
- You get a break when you need it: The COVID-19 crisis has left millions of Americans out of work and struggling to cover their bills. Not having to pay off student loans during this period can provide much-needed financial relief.
- You can build an emergency fund: If you are unsure about your income or job security during the pandemic, it may be wise to take advantage of the pause in student loan payments and save as much as possible in an emergency fund.
- Your loan forgiveness requirements will still be met: If you are enrolled in an income-driven repayment plan or are working towards public service loan forgiveness, your monthly non-payments during the pandemic will still count toward the required number of payments for loan forgiveness.
Cons
- You will eventually have to pay off the debt: The student loan moratorium is temporary, and you will be required to resume payments once it ends. Your loan term will be extended by the number of months of missed payments, and you will still owe the outstanding principal balance.
- Interest will accrue on some loans: While federal student loans had a 0% interest rate during the pandemic, private student loans may still accrue interest. This means that you will have to pay off the accrued interest in addition to your regular monthly payments once the moratorium ends.
- Your loan payments may be recalculated: If your loan follows a traditional repayment plan, your lender may recalculate your monthly payment amount after the deferment period. This could result in higher monthly payments or a longer loan term.
- It may affect your long-term financial goals: While not making student loan payments during the pandemic can provide short-term relief, it may set you back in terms of your long-term financial goals, such as saving for a house or retirement.
It is important to carefully consider your financial situation, loan terms, and repayment options before deciding whether or not to pay off your student loans during COVID-19.
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How to manage student loans during COVID
The COVID-19 pandemic has had a significant impact on the finances of millions of people, including those with student loans. Here are some ways to manage your student loans during the COVID-19 pandemic:
Understand your loan type
The relief options available to you depend on whether you have federal or private student loans. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides relief for federal student loan borrowers, automatically pausing payments and waiving interest charges. Private student loans are not covered by the CARES Act, but some lenders may offer forbearance options, so it is important to contact your lender to discuss alternatives.
Take advantage of payment pauses
During the COVID-19 pandemic, the US government announced several extensions of the suspension of federal student loan payments, with the most recent extension ending on December 31, 2022. This pause in payments can provide much-needed financial relief, especially for those facing economic uncertainty. However, if you have the financial means and choose to continue making payments during this period, your entire payment will go towards reducing the principal balance, helping you pay off your loan faster.
Explore other options
If you are still struggling with student loan payments once the suspension ends, there are other options available. You may be able to request a deferment or forbearance, change your repayment plan, or explore loan forgiveness programs such as Public Service Loan Forgiveness or income-driven repayment plans. Additionally, the Biden administration has announced plans to cancel a portion of student loan debt for eligible borrowers, although this decision is currently facing legal challenges.
Manage your finances effectively
The pandemic has caused economic uncertainty for many, so it is important to prioritize building an emergency fund that can cover at least three to six months' worth of expenses. If you are employed and have financial resources, consider using this time to reduce your principal balance. You can also work on building your credit, managing your debt, and setting long-term financial goals.
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Student loan relief programs
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provided relief for federal student loan borrowers. This meant that student loan payments were automatically paused from March 13, 2020, until September 30, 2020. This relief applied only to federal student loans, not private student loans. However, some private lenders offered forbearance options for borrowers struggling with payments.
If you were enrolled in an income-driven repayment plan, your monthly payments could have been reduced to as low as $0 during the pandemic. Your non-payments would still count toward the required payments to receive student loan forgiveness, but you would owe income tax on the amount of student loan forgiveness you received. If you were planning on public service loan forgiveness, your monthly non-payments would count toward the required 120 payments, and you would not owe income tax on the amount forgiven.
If you had the financial resources, it made sense to continue making payments on your federal student loans during the pandemic. Because interest charges were on hold, 100% of your payments would go toward the principal balance, helping you to pay off your loans faster and save money in the long run.
The COVID-19 EIDL program provided loans and advances to help small businesses recover from the economic impacts of the pandemic. As of January 1, 2022, the SBA stopped accepting applications for new COVID-19 EIDL loans or advances.
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Frequently asked questions
No, under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), federal student loan payments were automatically paused from March 13, 2020, until September 30, 2020.
Not paying during the forbearance won't hurt your credit. Your non-payments will still count toward your required payments to receive student loan forgiveness. However, you will owe income tax on the amount of student loan forgiveness you receive.
No, many lenders are offering forbearance options for borrowers struggling with private student loan payments. However, you should check with your lender to understand the financial implications of any payment pause.
If you have an emergency fund and believe your income won’t be affected by COVID-19, you may still want to make payments to reduce your principal balance faster. However, if you are worried about losing your job, it’s probably better to take advantage of the pause in student loan payments and save as much as possible.
You can request a deferment or forbearance from your lender. During the pandemic, many lenders created assistance programs to help borrowers facing financial hardship due to COVID-19.
