Hi everyone! Welcome back to Melissa Making Cents!
To say that our world is going through a "rough spot" is perhaps the understatement of the year. The last few weeks as a financial advisor here in Dallas, Texas has been a roller coaster of extreme highs and lows. Worry turns to hope and hope turns back into worry as we see the various news stories pertaining to our economy and Covid-19.
I often look for the silver linings in gloomy situations. A benefit to our situation is being able to focus on our families and examining our finances and what is truly important to us. As a financial planner, I know that the Bear markets and Bull markets both have their seasons, but that knowledge alone doesn't make the market volatility any easier to swallow. Especially for younger clients who may not have experienced a market correction in their "adult" lifetime. Many recent college graduates and families planning for college are overwhelmed with the idea of paying off their college education.
Now, it’s no secret that having large amounts of student loan debt is scary under “normal” circ*mstances. But it can feel even scarier right now with COVID-19 affecting all of us. That doesn’t mean you should feel stuck in reaching your debt-free goal! In fact, this is a great time to create a plan to get your debt paid off and take advantage of current resources provided by our government. In this post, I’m going to walk you through some options to tackle your student loans during the coronavirus. Let’s get started!
Step 1: See If You’re Eligible for the Federal CARES Act
On March 27, the federal government approved the CARES Act to provide economic relief to millions of Americans. You’re probably familiar with the CARES Act because of the $1,200 stimulus payment that was all over the news. But another part of the act provides temporary relief for some types of student debt. Specifically, “federally held” student loans have been granted an interest-free, six-month forbearance period in which borrowers do not have to make payments--and will not suffer a penalty.
You might be wondering if your loans are eligible for this forbearance period. According to StudentAid.gov, the types of loans that typically fall under the “federally held” category include:
- Defaulted and nondefaulted Direct Loans
- Defaulted and nondefaulted Federal Family Education Loan (FFEL) Program loans
- Defaulted and nondefaulted Federal Perkins Loans
- Defaulted Heath Education Assistance Loans (HEAL)
So how do you gain access to this aid if you fall into one of the above categories? You have to...do nothing at all! The Department of Education automatically adjusted all eligible student loans back in March to prevent interest from accruing. If you are waiting for the ...but... here is its. The Department of Education may have adjusted all the applicable loans, but there was a grace period of April 10th to stop any automatic payments. I would recommend checking your bank to see if your student loan payments have auto drafted. If they have, contact your loan servicer and ask for a refund!
However, there is an important caveat. The CARES Act does not cover “federally guaranteed” loans. What’s the difference between a “federally held” loan and a “federally guaranteed” loan? “Federally held” loans are taken out from the federal government, while “federally guaranteed” loans are owned by private institutions and are backed by the government. This means that the federal government will only step in to pay if the borrower defaults. Some FFEL Program and HEAL loans fall into the “federally guaranteed” category, and some Perkins Loans are owned by the college or university itself rather than the government.
So how many people aren’t eligible for CARES? MONEY Magazine estimates that about 12% of borrowers, or eight million people, have “federally guaranteed” loans that do not qualify for the CARES Act. If you’re curious about which situation you fall into, your federal loan servicer can best provide that information. You can also check the “Loan Breakdown” section of your StudentAid.gov portal, and any loan that begins with “DEPT OF ED” will be eligible for the six-month forbearance. If you are still not certain, give me a call and I can help determine your loan status.
Step 2: Consider Consolidating Your Loans or Requesting Forbearance
The good news is if you have a federally guaranteed loan and are therefore not eligible for the six-month reprieve, there are other options available to you. First, you could consolidate your Federal Family Education Loans into the Direct Loan program, which is eligible for the benefits of the CARES Act. However, the process can take between 45 to 60 days to complete.
Before you consolidate, I would suggest you due a little due diligence and create a solid plan to get your student loan debt paid off. When you consolidate there is always potential that you might also end up with a higher interest rate than what you’re paying now when the forbearance ends, which could leave you worse off in the long run. Walk, do not run or rush this decision. Loan servicer representatives are not always qualified or educated in the nitty-gritty of the loans.
Another option if you are facing financial hardship is to contact your loan servicer to ask for forbearance. While interest will continue to build, forbearance will kick into effect much faster than consolidating the loans. Forbearance can also last up to 12 months, and it won’t have a negative impact on your credit score.
In addition, if you’ve recently lost your job or had your hours reduced, you are likely eligible for unemployment deferment for paying off a subsidized loan. This requires an application, so it could take a few weeks for approval, but once approved you will not accrue interest during the duration of the deferment. This would be the best-case scenario, if you qualify.
Step 3: Pay Down Debt Anyway
Suppose your loan is eligible for the CARES Act, and you have a six-month forbearance period with 0% accrued interest. If you keep making payments during the forbearance, you could end up paying off your debt faster! That’s because after your payments cover all interest accrued prior to March 13, your payments will be directly applied to the principal.
Remember that regardless of whether your loan is eligible for CARES, or if you contacted your loan servicer and received forbearance, you can still make monthly payments even if they are less than what you typically owe. As a financial planner, I also recommend trying to maintain the habit of submitting a monthly payment, even if it’s less than usual. The more you can chip away at your debt, the better!
How does the CARES act affect the Public Service Student Loan Program?
Paying down your student loan principle can definitely make... ahem...cents! If you are not sure how student loans work, you can visit my blog Do Student Loans make Cents? One should also remember that if you qualify for the Public Service Loan Forgiveness program, making extra loan payments may not be a great idea. The Department of Education has said that the 6 months of automatic forbearance still qualifies as payments made under the Public Service Loan Forgiveness Program! I'm happy to help you create a plan for your student loan debt.
Step 4: Review Your Money Habits
This brings us to the last point. Whether you are still required to make your monthly loan payment, or you were able to get forbearance and want to keep making payments, you might be experiencing other financial changes due to COVID-19. Maybe you or your partner are out of work. Perhaps you’ve found yourself spending less because of stay-at-home orders. Now’s the time to break out an Excel spreadsheet and those bank statements to see where you can reduce spending both in the short term and in the long term. If you’ve paused your expensive gym membership during the pandemic and started working out at home, consider doing that long-term to save some extra money each month. Or if your takeout spending has gone through the roof during quarantine, see if you can dial it back.
You might also find it helpful to work with a financial planner. I work with clients to set their financial goals, especially for college planning and paying off student loan debt. Let me tell you--if you’re not already in the habit of tracking all your expenses, start now!
Until next time...this is Melissa Making Cents! Stay healthy and stay safe!
Melissa Anne CoxCERTIFIED FINANCIAL PLANNER™is a College Planning and Student Loan Advisor in Dallas, Texas.
