Student loan debt reached $1.48 trillion in America by the end of 2019, with approximately 45 million borrowers across the United States1. Amidst the COVID-19 pandemic, many Americans have experienced financial instability. For 45 million Americans, paying down student loan debt may be harder than ever before.
On March 27, 2020, the CARES Act was signed into law. While this stimulus package provided a wide array of assistance for families and businesses, it also made some important changes to assist federal student loan borrowers. Federal student loan payments were suspended through the end of September 2020, and no further interest was accrued. This date has been extended three times, most recently until the end of August 2022.
Biden’s Executive Order
President Biden took office on January 20, 2021, and, in a historical move to combat several ongoing crises across the country, signed 17 executive orders. One of these orders requested that the Department of Education continue to pause student loan repayments amidst the continuing pandemic.
Question #1: Are Interest & Payments Suspended on All Student Loans?
The suspension of payments applies only to student loans that are held by the federal government. However, your FFEL (Federal Family Education Loan) lender or school may have suspended interest and payments voluntarily, but they are not required to do so.
Regarding your federal student loans, your servicer will suspend all interest and payments through August 31, 2022.2
The federal moratorium does not apply to private student loans that are owned by banks, credit unions, schools, or other private entities. If you are trying to suspend payments to these institutions, you will need to contact them and find out what your options are.
Question #2: Should I Apply to Suspend My Payments or Interest?
Until August 31, 2022, there will be no interest accrued or payments due for federal student loans.2 No action is required on your part, as these payments will be stopped automatically.
Question #3: What Should I Do if I’m Behind on Payments?
On March 25, 2020, the Department of Education announced that it would not be withholding federal tax refunds, Social Security payments, or garnishing wages from those who have defaulted on their federal student loan payments.2 Additionally, private collection agencies contracted by the government will put a pause on attempting to contact defaulted borrowers. These changes will continue to be in effect through the ongoing COVID emergency period.
Any defaulted federal student loan will not collect interest until August 31, 2022.2
What to do about the Pause in Payments
Bolster your emergency fund
Every year economists from the Board of Governors of the Federal Reserve System ask consumer-finance related questions to a representative sample of U.S. adults through the Survey of Household Economics and Decision-making. The purpose of this survey is to gauge and report on the vulnerability of the U.S. household. One of the questions routinely asked about household financial well-being is about the ability to pay for a $400 emergency. Currently, over 65% of Americans would not be able to cover a $400 emergency. This question has become a barometer for measuring the financial fragility of the American public.
Coincidently, the average federal student loan debt monthly payment is also around $400. Since that cashflow has been freed up thanks to Biden’s executive order, a great opportunity to shore up your personal finances has become available. Most financial advisors recommend at least 3 to 6 months of expenses saved in a savings account.
Pay Off High Interest Credit Cards and Loans
The average college student has $3,280 worth of credit card debt. This debt comes with some of the highest interest rates out there. It is not uncommon to see interest rates north of 20% to 30% on credit card debt. This amounts to over $100 a month in just interest charges. Any dollar you use to take care of this debt is like getting a guaranteed 20% to 30% return on your money. This kind of risk-free return is impossible to beat in the markets.
Continue Paying Your Student Loans
Once you have boosted your emergency fund and taken care of high interest loans, the next step is to start tackling the student loan debt itself. Usually, when you make a loan payment, part of the payment goes to the principal, and part of the payment goes to cover the interest. Early on, more of that payment is going toward covering interest expenses, and you are only paying down a little of the principal. With the suspension of interest charges on loans, 100% of any dollar you pay will go straight to paying down the principal. This means you can pay the loan down faster and the total interest you pay will be reduced going forward. This is a win on both fronts.
Following these steps will help you gain a solid financial footing and is a big reason the Biden administration has continued to suspend these loan payments and talk about student loan reform.
If we can help you or anyone you know with questions about student loan debt, please don’t hesitate to reach out to your Telarray advisor.