Like nearly every other aspect of life, student loans were thrown into a whirlwind when COVID-19 began to spread across the country early last year. Fortunately, those that are still repaying their federal loans were given a reprieve. Under the CARES Act, federal student loan payments and interest accrual was suspended beginning in March 2020. This suspension was set to expire at the end of January but the Biden administration announced that will remain in effect through September 2021.
The most recent relief act did not extend these benefits so federal student loans will go back into repayment in February. It’s possible that the new administration will push for more federal student loan relief but in the meantime, those with outstanding federal student loans should expect to begin repayment when the calendar turns to February.
What should I do if I cannot make my payments when the payment pause ends?
If you were financially impacted by the pandemic or for other reasons you will not be able to make your payments, you still have options:
- You can apply for income based repayment plans, which will adjust your monthly payment amount to an amount you can afford based on your current income.
- You can ask for extended repayment plans. All federal loans default to a 10-year repayment plan. You can have this changed to a longer term that will lower your monthly obligation. This does increase the total cost of the loan so you want to be careful, but there is no prepayment penalty so you can always pay more when you can to offset the increase.
- You can ask for graduated repayment plans. This will start your monthly payment at a lower amount and gradually increase the monthly payment once every two years. It also increases the total cost of the loan but, like an extended plan, has no prepayment penalty.
- You can also choose a combination of these types called an extended graduated repayment plan that will start your payment low and increase them over time. But with this option it will be over a longer period of time.
- The last choice is an economic hardship or forbearance. This is a temporary postponement of payments. Interest does accrue during this time so your loan balances will be increasing. They do give you the option to make interest only payments to prevent this from occurring.
Each one of these repayment plans has its pros and cons and choosing which one is right for you can be difficult. The government has developed a tool to help guide you through the process of choosing the plan that works the best for you. You can learn more about these plans and use the tool to help you decide at studentaid.gov under the “Manage My Loans” section.
What if I am able to make my payments?
If you have federal student loans you should always think twice about refinancing them into a private student loan. Federal loans have benefits that you give up if you refinance them into a private loan. These include public service loan forgiveness, teacher forgiveness, benefits for military personnel, income-based repayment plans and the possibility of any future general loan forgiveness. Yet with interest rates currently at historical lows, it is worth looking into if you are financially secure or want to aggressively repay your loans.
You can refinance a single or multiple loans into one loan at different interest rates and terms depending on your goals. Private lenders offer interest variable and fixed interest with loan terms of 5-, 7-, 10-, 15- and 20-year options.
All federal loans have fixed interest rates so you need to first determine what your current rate is and then compare it to what interest rates are available. As private lenders tend to offer a range of interest rates based on your creditworthiness, you have to apply online to get a rate quote to be able to make the determination if it is worth it for you. Some lenders will have a pre-qualify option with a soft credit check and give you an estimated rate in as little as 15 minutes.
Shorter terms loans generally have lower rates and can save you the most amount of money but have higher monthly payment amounts. This is good option for someone who wants to pay them off quickly and has the monthly budget to afford it. Longer term loans will have higher interest rates but lower monthly payment amounts so this can be a better choice for someone who needs a little more help with the monthly budget.
When it comes to managing your student loans it is a good idea to review your loans annually, compare your rates to the current market rates, evaluate your financial goals and then structure your loans to match your current financial situation. You can change the way student loans are structured as much as you need to as there is no cost to refinancing.
Donald Kerr is the Senior Manager of Student Lending at AAA Northeast.
Learn more or schedule an advising appointment at AAA.com/FinancialAid.