A typical email I receive is something like, "Help! I have student loans—what advice can you give me?" I certainly understand why many graduates feel buried under the weight of debt.
The burden of student loans causes many people to feel like they can't fully live their life.
According to Educationdata.org, student loan debt in the U.S. totals $1.68 trillion. It's held by 44.7 million borrowers, who owe an average of $37,584. Borrowers with federal loans owe slightly less—$36,520—and those with private student loans owe much more—$48,819.
The burden of student loans causes many people to feel like they can't fully live their life. You might delay getting married, starting a family, buying a home, or starting a business due to the financial burden.
Today, we'll review updates to COVID relief for student loan borrowers and I'll offer tips to help you manage your federal and private student loans. Knowing your options can help you find the best repayment strategy and relieve financial stress.
Updates to COVID student loan forbearance
When the pandemic's economic fallout began, it was clear that student loan borrowers would need assistance right away. So, in March 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act became law. It suspended payments, stopped collections on defaulted loans, and set the interest rate to 0% for loans owned by the U.S. Education Department through September 30, 2020.
Before the student loan forbearance period expired, it got extended through December 31, 2020. Then the measures got extended again to January 31, 2020, and finally to September 30, 2021.
Which student loans qualify for COVID relief?
The federal government must own a student loan to qualify for relief under the CARES Act. They include:
- Direct Loans that are unsubsidized or subsidized
- Direct PLUS Loans
- Direct Consolidation Loans
- Federal Family Education Loans (FFEL)
- Federal Perkins Loans
However, FFEL loans owned by a private lender or Perkins loans held by your school don't qualify for forbearance.
Should you consolidate loans to qualify for COVID relief?
I mentioned that Direct Consolidation Loans are eligible for relief. The government offers this option when you have more than one federal student loan in your name. They can be consolidated or combined into one new loan with an interest rate that's a weighted average of your loan rates.
Doing a consolidation would qualify the loan for COVID relief. However, the interest rate could be higher after the suspension expires
Doing a consolidation would qualify the loan for COVID relief. However, the interest rate could be higher after the suspension expires than what you're currently paying. Another downside is that you may lose benefits from your original loans, such as forgiveness for public service work, repayment options, and interest rate discounts or rebates.
Speak with your loan servicer about the pros and cons of consolidating a non-qualifying loan to take advantage of the no-payment and no-interest suspension period.
If you're not sure what type of student loan you have, ask your servicer or use the National Student Loan Data System to find out.
What relief is available for private student loans?
If you have student loans held by private companies or educational institutions, they may offer relief if you request it. For instance, some loan servicers give borrowers in good standing a 60- or 90-day forbearance.
However, interest is likely to accrue on private loans during a suspension. So, if you have both federal and private loans and are struggling to keep up your payments, prioritize your private loans while your qualifying federal loans are in forbearance. That will keep your interest expense as low as possible and protect your credit while you're managing a financial hardship.
Interest is likely to accrue on private loans during a suspension.
If you have multiple private loans, you may qualify to refinance them for a lower interest rate, cutting your monthly payment. And some lenders may also refinance federal and private student loans together. But a private lender will evaluate your current financial information for a new loan or refinance, so you may not get approval if you're in financial hardship.
Every lender's underwriting requirements for refinancing are different, so you need to shop and compare offers from several companies to make sure you get the best deal.
Should you pay a suspended student loan?
If your student loan qualifies for relief, your loan servicer should have contacted you or stopped your automatic payments back in March 2020. Again, that arrangement will continue through at least September 31, 2021. It's a welcome relief if you're dealing with a financial crisis, but it's optional.
If you can afford it, continuing to make full or partial student loan payments during the forbearance can help you get ahead because the full amount gets applied to your balance (after any accrued interest or fees). That allows you to whittle down your debt faster. However, you don't have to pay to get 0% interest during the relief period.
If you can afford it, continuing to make full or partial student loan payments during the forbearance can help you get ahead because the full amount gets applied to your balance.
One situation when you shouldn't pay a suspended student loan is when you're in a forgiveness program, such as the:
- Public Service Loan Forgiveness Program if you work for the government or a nonprofit
- Stafford Loan Forgiveness Program for Teachers if you're a professional teacher at a nonprofit or public school
- Perkins Loan Cancellation is for certain public servants—such as teachers, law officers, military, medical providers, and firefighters—who work with low-income families, special needs students, or teach a subject with a shortage of qualified teachers.
Skipped payments during the relief period count toward loan forgiveness, just like you paid them. Therefore, it's in your best interest not to continue paying student loans that qualify for forgiveness. You're better off using the money for something else, such as shoring up your emergency fund.
Skipped payments during forbearance don't hurt your credit scores. Your payments get reported to the credit agencies as if you made them on time.
How to manage your student loans after the suspension
The CARES Act could extend student loan relief beyond the current expiration of September 30, 2020. But if not, you should receive notice from your loan servicer at least 21 days before your payment is due.
If you're worried that you won't be able to afford your loans after forbearance, it's an excellent time to investigate a repayment plan that will meet your needs. Check out the federal government's Loan Simulator tool to see what your payment would be under various options, such as enrolling in an income-driven repayment (IDR) plan.
An IDR plan may reduce or eliminate payments based on your income and family size. If you enroll in one during the suspension period, your payments may automatically remain suspended after the relief expires.
If you're already on an IDR plan and your income dropped, be sure to update your information so you get a new payment amount based on your current financial situation. When the forbearance ends, you may be eligible to pay a lower amount that is more affordable. In addition to using the Loan Simulator, you can also contact your loan servicer to discuss the best repayment plan.
5 ways to pay off student loans faster
If your finances are in good shape and you want to pay off your federal and private student loans faster, here are five options.
1. Pay biweekly
You can use a secret weapon for whittling down your balances on student loans (or any installment loan) faster and pay less interest: Make biweekly instead of monthly payments.
Biweekly payments take advantage of the fact that one month out of each quarter has five weeks instead of four. There are 13 weeks in each quarter, not 12, and 52 weeks in a year, not 48. So, it's a sneaky way to get the equivalent of one extra monthly payment made each year.
2. Pay more than the minimum
If you have extra money each month, you could pay more than the minimum payment.
Just make sure that your lender knows to apply the extra toward your principal balance. Otherwise, they may consider it a prepayment for the following month, which doesn't help you eliminate the balance faster.
3. Use windfalls to pay down debt
As tempting as it can be to quickly spend a bonus, gift, or tax refund on a luxury item, remember that using a windfall to pay down debt is the most effective way to get rid of it faster. Use any additional income, such as a raise or bonus, to accomplish important goals, such as shoring up your emergency fund, investing for retirement, or paying down debt.
4. Use workplace student loan benefits
Check with your human resources department to find out if there are any student loan benefits. If not, propose it as a win-win to help the company retain the best talent and reduce workers' financial stress.
5. Automate payments
Many lenders offer to automate loan payments by drafting them from your bank account on a given day each month. Some may offer a slightly lower interest rate because they know you're less likely to miss a payment. Paying less interest can help you pay off your student loans a little faster.