Derenda King, CFP®/CSLP®
The U.S. Department of Education has announced a final extension for borrowers with federal student loans through Jan. 31, 2022.
The original coronavirus relief bill, known as the CARES Act, was signed into law in March of 2020. It suspended loan payments, set interest rates at 0%, and stopped collections on defaulted student loans.
The last administration extended the pause until December 31, 2020, which was ultimately extended again by Betsy DeVos, the education secretary at the time, through January 31, 2021. At the request of the new administration, Phil Rosenfelt, the Acting Secretary of Education, extended the pause to September 30, 2021. As a cumulative result, for nearly two years, federal student loan borrowers were not required to make payments and saw no interest accrual during the relief period.
No action is required by qualified borrowers, as the loan payment suspension or forbearance will automatically continue through the end of January. Does that mean that borrowers must resume paying on February 1? Not necessarily. Loan servicers should contact borrowers before the extension ends to confirm when to resume payments. However, if no information is received, borrowers should contact their servicer to confirm their due date. They shouldn’t assume that if they are not contacted by their loan servicer that they aren’t responsible for resuming their payments, as this could put them at risk of accumulating late fees and perhaps even defaulting on their loans. Remember, it’s the borrower’s responsibility to pay their loans on time, whether or not they receive communication from their lender.
What about Private Student Loans?
Unfortunately, the extension only applies to federal student loans, such as Federal Student Subsidized Loans, Federal Student Unsubsidized Loans, Federal Parent PLUS Loan, and Graduate PLUS Loan. However, many private student loan lenders are offering relief similar to the temporary forbearance, but interest will likely still accrue. Borrowers with private loans can start by checking their servicer’s website for information on COVID-19 relief or contact them to inquire about forbearance or rate reduction programs.
What Can You Do with the Extra Money?
Extra funds are always great, but it's important to have a plan for using the money—otherwise, it can disappear quickly on day-to-day expenses.
1. Increase your savings
If you don’t have an emergency fund or have depleted it during the pandemic, consider using the extra money normally used for your student loan payments to rebuild it. The general rule of thumb or recommendation is to save somewhere between 3-6 months’ worth of take-home pay. However, in light of the pandemic, some may want to increase it to 6-9 months or even more.
2. Get on a debt diet
Consider paying down high-interest rate debt, such as credit cards, before student loan payments resume. This strategy is known as the “Debt Avalanche Method.” Another strategy is to begin clearing off the debts with the smallest balance first, known as the “Debt Snowball Method.” Whichever strategy you use, aim to pay off as much as you because doing so can benefit you greatly in the long run.
3. Invest in your future
If you have ample emergency savings and have paid off high-interest rate debt, consider investing the additional money. Begin with ramping up your retirement contributions and set auto contributions if you haven’t already. If you have, consider increasing your contributions by 2% (or more) of your income and set it up so that it will automatically increase the same amount the following year. If your retirement savings are on track, then consider investing for other goals that you may have such as buying a home, starting a business, or simply building your wealth. For example, you can begin by opening a brokerage account and start with a recurring deposit of $50 (or more) a month. Investing the extra money helps it grow over time thanks to the magic of compounding interest, which potentially enables you to earn money on top of the money you earn.
4. Factor your new loan payments into your budget
Review your budget and student loan repayment plan. Many of you have experienced quite a few changes during the pandemic, such as a job loss or a reduction (or increase) in income. So, now is a good time to reassess your repayment strategy, meaning making sure you can afford the new payment and if not, determining what repayment options may be available to you. A financial advisor, certified student loan expert or your student loan servicer can provide assistance and direction.
5. Continue making student loan payments to reduce your principal
Whether or not you should continue paying on your student loans depends on a number of factors. If you are likely to qualify for Public Student Loan Forgiveness (PSLF) in the future, you will not benefit from paying on your loans during the suspension. However, if you have private loans or other debts, such as high-interest rate debt mentioned above, you may want to prioritize paying off these loans. On the other hand, if you are unlikely to qualify for PSLF, then you first need to determine if you have unpaid accrued interest and how much. If you have accrued interest, any payments made will go towards paying that off first, before it will go towards your principal. If you don’t have accrued interest and you’ve implemented all of the above recommendations (emergency savings, paying off debt, investing), then you may want to consider using the extra money to aggressively pay down your principal while there is a zero percent interest rate.
Current State of Student Loan Forgiveness
Student loan forgiveness has been a campaign promise for years. The current administration campaigned on the promise of student loan forgiveness, declaring that it would forgive up to $10,000 in federal student loans. High ranking Democrats have been pushing for even more – up to $50,000 in student loan forgiveness. So, where are we now?
Since taking office, President Biden has questioned his executive authority to forgive student loan debt and has deferred the matter to the Education and Justice departments for their official rulings. The findings will be made known later this fall. If it’s determined that the President does not have the authority to cancel student loan debt, the matter will officially transfer to Congress. Even if legislation was agreed upon, the likelihood that all federal loans will be canceled is very slim. Moreover, a number of eligibility requirements, such as income limits, will likely be required.
More Updates are Expected
Stay tuned. The Federal Student Aid site provides the latest updates about the coronavirus student loan relief and its impact on students, borrowers, and parents. For more information on student loan forgiveness legislation, visit the U.S. Department of Education’s website.