Current Situation

Federal student loans have been in forbearance since the CARES Act was passed in March of 2020 to ease the financial burden of those affected by the Coronavirus.  The forbearance is currently set to expire on Jan 31, 2022, unless there is another extension.  This date has been extended a few times already, but any further extension is highly unlikely, but time will tell.

Not everyone with student loans is included in the program; only those with federally held student loans or those owned by the U.S. Department of Education are affected.  Therefore, if you happen to have a private student loan or some Perkins loans, they are not affected by the Cares Act and will continue normally.  On the other hand, if you have a federally held student loan, you may have noticed that your automatic payments have stopped.  There was no action needed on your part; as part of the Cares Act, anyone with a federal student loan will automatically be in forbearance.

What is Forbearance?

In the case of federal loans under the CARES Act, while in forbearance, the loans are essentially on pause.  No payments are due while in forbearance and the interest charged during the forbearance period is 0%.  Therefore, the burden of having to make a debt payment and interest adding up is not a factor during the forbearance period.

Options:

How you have been affected by covid will help determine the best course of action for your student loans while in forbearance.

1. You’re Struggling

If you have been faced with financial hardship since Covid began, having one less bill to pay might be a massive help for you.  Since March of 2020, many people have been unable to work due to layoffs, furloughs, childcare demands, or health concerns, which is the primary purpose of such legislation, to help those genuinely struggling.  If you are struggling to keep up with your expenses, focusing on meeting your current bills should be your priority.

2. You’re OK, but Short on Savings?

Maybe you’ve been meeting your expenses without any trouble, yet you have not had a chance to build a sufficient emergency fund.  While meeting your needs without difficulty can be comforting, that comfort can quickly turn stressful if any significant expense pops up in life, which is always a possibility! Having your student loans in forbearance can be an opportunity to put aside money for savings to ensure you have cash set aside for emergencies.   Instead of paying the student loan payment, direct that payment amount towards building an emergency fund. A goal to start with is setting aside 3-6 months’ worth of expenses in an easily accessible account, such as a savings account at a bank.  If you have a family or others who depend on you financially, having more, such as 12 months of expenses, earmarked for emergencies is smart.

3. In Good Shape!

If your cash flow has not been affected by the covid pandemic and you have a sufficient emergency fund, it may be best to continue your payments as usual.  This will keep your cash flow and expenses consistent now and once the payments begin again in February 2021.  Any payments you make during forbearance will be fully applied to the loan’s principal, having a greater impact on the loan balance than your payments normally do when interest is included.   This can reduce the duration of your loan, total interest paid overtime, and therefore leave you with more money in your pocket.  Remember your loan is automatically in forbearance and not collecting automatic payments, so if you would like to continue payments, you will have to take the extra step to do so.

Maybe your financial situation has improved since 2020, and you’re considering making extra payments. Before you decide where to direct your extra payment, you will want to look at all your debt. There are many strategies to paying down debt, including focusing on the highest interest rate debt first or starting with the lowest balances. If you have other debt, such as credit cards or personal loans currently accumulating interest with a higher rate than your student loans, it may make more sense to put any extra payments towards those instead. Determining which is considered good debt versus bad debt may also help determine where to focus.

Before using your extra cash to make additional payments towards debt, it is important to consider the opportunity cost.  Instead of making extra payments, it could be invested. Depending on the rate of return and your investment profile, you may feel you can earn more by investing than the interest being charged on the debt; in that case, you are leveraging your resources for the better and keeping on your regular debt payment schedule may be advantageous.

Plan ahead for January

As the current extension stands, payments are set to resume on Jan 31, 2022.  If you’ve been continuing your payments all along, you should not be affected.

For those who have taken advantage of the forbearance out of need, February’s looming payment may seem stressful.  Luckily, there is time to prepare! Now is a terrific opportunity to look closely at your expenses and see if you can find more money in your current budget.  Maybe there are expenses you can trim from your cash flow to create space for the upcoming payments.

Another way to help prepare for payments to resume is by increasing your incoming cash flow.  Are you able to take on a part-time job or have a side hobby that can create some additional income?  Might a career move be beneficial for you?  With minor adjustments to income or expenses or both, you can be better prepared for the student loan payment to resume and more comfortably fit into your budget.

Options if Still Unable to Pay

If you are someone who has truly benefitted from the forbearance due to financial difficulties, there are still options for you.  One of the main benefits of having a federal student loan versus private loans is the repayment options during financial hardship.  Income-Driven Repayment Plans can make payments more affordable based on your income and family size.  You will have to apply to be approved and recertify each year, yet this can dramatically reduce your monthly payments.

As a last resort, Federal Student Loans also offer deferment and forbearance options due to financial hardship.  This is not the same as the current program implemented as a result of the Coronavirus.  You will also need to apply for forbearance or deferment, and if approved, will be allowed to temporarily stop making payments on your loan.  The downfall is that interest will continue to accrue during the deferment period, which will cause the balance of your loan to grow, snowballing as the balance increases and interest continues to be charged on that balance.  Therefore, it is important to understand the specific implications and repayments once payments resume.   If you are potentially eligible for forgiveness, the time period when loans are in deferral may not be counted toward the time requirements needed for forgiveness

With interest rates at historic lows, you may be tempted to refinance your student loans.  This can be beneficial for consolidation purposes as well as to reduce interest rates.  Many student loans can be refinanced into longer terms, which can make payments more affordable, yet keep in mind the longer duration of the loan will add up to more interest costs over time.  Another important thing to consider before refinancing any federally owned student loan to a private loan is that they will no longer be eligible for repayment options.  If you foresee a change in your finances or are worried you may need to take advantage of these options at some point; it is best to keep your options open by not refinancing.

All things considered, there are many strategies to manage your student loans while in forbearance. It is essential to evaluate your financial position to determine the best action to take if any action at all.