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(From the Financial Literacy Blog) – Due to the COVID-19 pandemic, all federal student loan borrowers were automatically placed in a period of mandatory administrative forbearance in March of 2020. For borrowers, this means no payments have been required since and all the interest rates on student loans were automatically set to 0%. Interest rates determine how much additional money a borrower owes a lender for the use of borrowed money. With a rate of 0% during the forbearance period, no interest has been accruing since March of 2020––even for borrowers not making payments. With 2021 coming to a close and the pandemic still impacting day-to-day life, President Joe Biden extended the student loan forbearance period to May 1, 2022. For those with student loans, what does this mean for them?
For Financially Stable Borrowers
If someone doesn’t have other high interest debt or their financial situation hasn’t been impacted by the pandemic, opting out of the remaining forbearance period may be a good option for them. With the interest rate set to 0% during this time, any student loan payments they do make will go entirely towards paying off their principal balance. This can help them pay off their student loans sooner. Since loans are in automatic forbearance, they’ll need to contact their loan provider to arrange for making payments again.
For Borrowers Who Are Struggling Financially
If someone is experiencing financial hardship as a result of the pandemic, they should take advantage of the forbearance period and not make their federal student loan payments until May. The money they would usually make a student loan payment with may be better used to pay high-priority bills, such as a mortgage or rent. With no interest accruing until May, the borrower won’t be penalized for not paying their student loans at this time. However, a mortgage lender or landlord may not be as forgiving. If someone is trying to prioritize which payments they can afford to make, they should continue to pay the bills that aren’t offering a temporary pause on both the principal balance and interest. For example, if someone has credit card debt with a high interest rate, they should pay that off first instead of continuing to make student loan payments that aren’t yet required.
- Get Organized: If someone hasn’t been making student loan payments, they should be getting everything in order for when payments resume. For example, if someone previously had automatic withdrawals set up for their monthly payments and has changed financial institutions since the beginning of the pandemic, they should update that information with their student loan provider. If someone has moved or changed their phone number, they should also update that information with their provider. The sooner someone takes these steps, the easier it will be.
- Budget For Student Loans Now: For those who haven’t been making student loan payments since March 2020, they may have gotten used to not having to budget for that expense. People should start budgeting for their payments now––even if they’re not officially due until February. This can help them determine what, if anything, needs to be cut from their budget so they can afford to pay their student loans.
May might seem far away, but it’s better for borrowers to plan ahead to ensure financial security. For questions about budgeting or to ensure your automatic payments are set up correctly, contact your local credit union.