Here is a not so fun fact: According to Student Loan Hero, the most recent data shows that there is $1.64 trillion in total U.S. student loan debt and about $161.3 billion of that (7.6 million borrowers) is currently in default. I could continue with more heart-wrenching statistics, but it would be redundant. The purpose of this post is to inform consumers on how student loans are impacted by COVID and the actions that you can take to better your financial situation.
Due to COVID, federal student loans are currently deferred for borrowers until September 30th, 2020. Although this brings temporary relief to student loan borrowers, many are worried about what will happen come October. Some borrowers have used this brief relief period even though they had a steady income source to pay off loans. However, many borrowers who are directly impacted by COVID may not be able to manage to make a payment.
These circumstances lead to a potentially catastrophic issue: an increase in student loan defaults.
A proposal for the HEROES Act could further benefit student loan borrowers by extending the relief of payments until September 30th, 2021. The House of Representatives, currently controlled by Democrats, have proposed this extension, but the Senate GOP leaders are playing hard to get. Political tension will remain as Democratic Nominee, Joe Biden is a supporter of canceling federal student debt.
It is important to stay updated on the news when it comes to student loans because it may impact you directly. I want to discuss some questions that frequently arise about student loans, especially during this time.
Should I max out my student loan payments or make the minimum payment and invest?
This is a very common question that I get from clients and friends. To me, it depends. Advisors are going to have different perspectives on this, but there are many factors and circumstances that need to be considered. Yes, debt can be bad. Some individuals are “anti-debt,” and this is largely due to their underlying money scripts. Their parents could be against debt, or the parents could have actually accrued a large amount of debt, and the child does not want to relive those challenging times.
I believe it depends because you need to evaluate your circumstances. Do you have a sufficient emergency fund? How much is the debt? What other goals do you have? Are you getting married soon? Planning to buy a house? All of these can impact your debt management decisions. It is also important to take your student loan interest rate and the rate of return on the market into consideration when deciding to invest or accelerate debt payments.
What is the difference between refinancing and consolidation?
When you consolidate your federal student loans, you combine your existing loans into one new loan with a new rate, which is a weighted average of your old loans rates. This allows simplicity with bill payments.
With private loan consolidation, you combine multiple loans into one, but your interest rate on your new loan is not a weighted average of your old loans rates. The private lender will assess a rate that is based on your credit management and other personal financial information. When you consolidate student loans with a private lender, you are also refinancing those loans.
Student loan refinancing is when a new loan from a private lender is used to pay off one or more existing loans. Doing this could allow a borrower to have lower payments and reduce the amount spent in interest over the life of the loan.
Should I refinance my loans during this low interest rate environment?
This question also depends. Yes, refinancing can potentially provide you a lower rate. One reason you should not consider refinancing is if you want a repayment plan based on your income. Many individuals are graduating with student loan debt that surpasses their annual income, and their only option is a repayment plan or a federal forgiveness program. If you decide to refinance with these programs, you lose the payments that you have accrued to receive forgiveness. During these unknown times, you may find comfort knowing these programs are available.
It is important to note that private loans do not have the forgiveness or payment plan option.
If you have a stable income, multiple student loans, good credit, and do not depend on the federal programs, refinancing your loans should be considered.
Should I continue making payments during the COVID forbearance period?
For most individuals, the answer is yes. If you are financially comfortable (stable income, sufficient emergency fund, no credit card debt, or medical payments), then continue making the payments. This will allow you to put a dent in the principal. If you need to use these funds to pay off credit cards or build your emergency fund, utilize this forbearance period!
There is nothing fun about student loans, but you are responsible for making sure you have explored all your options. Make sure you are educating yourself on the different federal forgiveness programs. I have also heard of borrowers negotiating student loan payments for lower wages with their employers. The CARES Act allows employers to pay up to $5,250 toward an employee’s student loans tax-free through the end of the year. Usually, these payments are treated as wages, but until the end of 2020, the payments are excluded from income and payroll taxes. If you are married, or soon-to-be, consider Married Filing Separately (MFS) tax status to take advantage of the income-based federal programs and the student loan interest deduction. Please refer to a CPA on this planning technique.
Lastly, if you want to discuss different payment plans, other debt, length of your payments, and your monthly budget and any other personal factors, talk to both a certified financial planner and your student loan servicer.
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