Afford Anything - PSA Thursday: What’s Happening with Student Loans?

Episode Date: December 11, 2020

An update on the latest news in student loan forgiveness and forbearance, plus smart strategies for student loan repayment in 2021. Learn more about your ad choices. Visit podcastchoices.com/adchoices

Welcome to PSA Thursday, once again coming out on Friday because I only have a tenuous grasp on days of the week. PSA Thursday is a weekly-ish bonus segment of the Afford Anything podcast in which we talk about how to handle money, work, and life in the context of the events of 2020. If you are new to these episodes, here's the deal. PSA Thursday episodes are nothing like our normal episodes. There's no intro music, no outro music, no sound effects, no production value. We intentionally keep it ad-free. these are much shorter than our normal episodes, and each one is hyper-focused on one specific actionable topic. So, for example, we've done previous PSA Thursday episodes on how to set up

a donor advised fund if the events of 2020 have encouraged you to do more charitable giving. We've done an episode on how to eat a budget-friendly, financially-friendly home menu, particularly if you've lost your job, money might be tight this year. We gave some grocery tips. We did an episode on how to teach your grandma about technology so that you and the elderly people in your life can face time with one another. We did an episode on PPP funding and alternatives to PPP funding if you are a small business owner. You can find all of those in our archives, which are available at afford anything.com slash PSA Thursday. Today we're doing an episode on student loans.

They are changing. The rules are changing. So what do you need to know? How much do you owe? When do you pay it? What is your student loan repayment strategy? We're going to dive into that in the context of all of the changes that have been made this year right now. So here we go. Now, the information in this episode is current as of Friday, December 11th. Laws and rules can change at any time as we discovered the hard way when we released the PPP episode, only to discover that the very premise of the episode had already gotten outdated by the time we released it. That's how

quickly things changed. So everything you're about to hear is the policy as of Friday, December 11th. Depending on when you're listening to this, things may have changed since then. So here's what we know. In the spring, the coronavirus aid, relief, and economic security act, known as the CARES Act, contained three key provisions for student borrowers. Number one, it temporarily paused federal student loan payment. Number two, it reduced those interest rates down to zero. On L.A. loans, meaning the loans that were paused were not accruing interest in the meantime. And number three, it stopped the collection of defaulted student loan debt. So if you had eligible federal student loans, you have received an interest-free grace period since the pandemic began. Now, those benefits

were originally set to expire on September 30th, but they have been extended until January 31st, which means that as of right now, if you hold qualifying federal student loans, then you're you're expected to begin to resume making ordinary payments in February. Will that happen or will something change between now and February? There's a lot of speculation around that question. In journalism, it's called the speculative story where you can gobble up a lot of headlines asking the question of what might happen. Somebody says X, but somebody else says Y.

And this third person offers Theory Z. You can gather a lot of clicks from those stories, but at the end of the day, what we know is that as of now, you are expected to resume payments in February, and things may or may not change in ways that nobody can accurately predict. If it were to change, then most likely it would happen in one of three ways. Either President Trump would sign an executive order that extends Cairs Act forbearance beyond the end of January, or President-elect Biden would sign an executive order offering federal student loan relief after he takes office on January. or Congress could pass another coronavirus stimulus package, a relief package that includes student loan relief. Now, there is bipartisan legislation that's being circulated that calls for extending that pause for an additional three months, which means if that were to pass, borrowers would

not have to start making payments again until May of 2021 instead of February. So there is a reasonable chance that payments may not resume until May, but the deal is never done until the ink is dry. So for your personal budgeting, as you're looking ahead to how you're going to budget your money for the coming months, as of right now, assume that you will have to start making payments in February until further notice. It's the don't count your chickens until they hatch approach to budgeting for student loan repayments. With regard to how to make that budget, here's what I would recommend. Budget as though you're going to start making payments again in February.

If it turns out that you don't have to make those payments, if there's an additional extension on the start date of student loan repayments, pretend that there isn't and continue making those quote-unquote payments into your own savings account. So, for example, if your student loan payment is $300 a month, create a budget in which, starting in February, you're making a payment of $300 a month. And if February comes around and it turns out that you don't have to send that payment to your loan processor, then in terms of your budget, quote unquote, keep making that payment. But instead of sending the 300 to your loan processor, send it to a savings account.

Ideally, a savings account that's at a different bank than the one where you have your primary checking account so that that way you can't actually see it. When you log into your account, you don't see the balance, and so it goes out of sight, out of mind. Now, there is speculation about whether or not a portion of federal student loans might be forgiven. We'll have the answer to those questions at some point in 2021. And the amounts that are being discussed range anywhere from $10,000 to $50,000. Given the fact that those talks are happening and that that speculation is in the news every single day, this does not seem like the ideal time to make additional payments on federal student loans,

assuming that your balance is $50,000 or less. So make the monthly payments that you owe, but don't try to get ahead of your payment schedule. Don't try to rapidly pay it off if there's a chance that that balance might be forgiven anyway. Instead, if your goal is to pay it off, if you do want your student loans wiped out, keep that money in a savings account, you know, make payments to yourself as though you're rapidly paying it off so that when we have an answer as to whether or not student loans will be forgiven, and if so by how much, you will have a lump sum of money in your savings account that you can then decide what to do with. So hypothetically, if it turns out that federal

student loans are forgiven up to $10,000, and you have a student loan balance of $15,000, and let's just say hypothetically that for six months, you were able to save $300 a month into a savings account by, quote-unquote, making payments to yourself. Well, great, then $10,000 is wiped out, and you have an additional $1,800 that you've saved that you can apply entirely towards principal, thus reducing your total balance down to only $3,200. Now, it's important to note that all of this discussion is around federal student loans and doesn't apply to private loans. So what should you do if you hold private loans? Well, if you are in a very tight financial spot and you need a deferment on your private loans, you'll have to reach out, see if your lender has any programs

or reach out to the lender and inquire about programs. That is one option. Another option is to refinance your private student loans to see if you can lock in a lower interest rate. The good news is the interest rate on private loans have fallen. Interest rates in general are very, very low right now. And when you refinance a loan, fundamentally what happens is that you get a loan from a different lender, and the loan from that new lender closes out the existing loan that you have. So the loan from the new lender pays off your existing loan and starts fresh with a brand new lender. Now, in the case of something like a mortgage where that loan is amortized and a refinance restarts the amortization clock, you want to be a lot more careful about making a refinancing decision. In

something like a student loan where there isn't that amortization schedule, there are lower barriers to refinancing. You don't have to worry about restarting an amortization clock. And so if you are able to refinance any private student loans that you already hold, that can be a good strategy for reducing your monthly payments and accelerating your payoff schedule. You know, if you were to reduce your monthly payments but continue paying the same amount that you were prior to the refinance, you can pay down more of the principal. and then get those paid off faster. Now, if you have federal loans and you have not yet looked into an income-based repayment plan,

that is another option. For details on that, I'll refer you to a previous PSA Thursday episode that we did, one that we aired on June 11th. I'll link to it in the show notes. In that episode, we did a deeper dive into income-based repayment, but one of the major takeaways of that episode, which continues to be true to this day, is that you may want to stop paying extra towards your student loans.

That was true back then and it continues to be true now. Make sure that you are current on your obligations, but don't go above and beyond simply paying the minimum, at least for the moment. Also, don't switch your federal loans into private loans. It can be tempting, particularly if you see private loans advertised at lower interest rates than what you're getting on your federal student loans. But given all of the talk that is happening right now about the possibility of, obtaining federal student loan forgiveness, this would not be a good time to take out a private loan and use that money to pay off a federal loan, because then you'll be stuck with the balance of a private loan, and that private loan certainly won't be forgiven. So if you do hold federal loans,

the major action steps right now are to look into income-based repayment plans and set up your budget as though you will resume making payments in February. Now, there's one more opportunity that you might have that's worth looking into. And this is not something that's been talked about very much. One of the provisions of the CARES Act allows employers to pay off up to $5,250 of their employees' student loan debt. If, and this is the big if,

if that employer already had some type of educational assistance program at the start of 2020. Basically, here's how it worked. Prior to the pandemic, there were some employers who had programs that would help employees pay for their education up to $5,250. So the employer could pay for that amount of money worth of new education that the employee would receive. Thanks to the CARES Act, that law has been modified so that the employer can now take that same amount of money. And instead of paying for new education, they can use that to help the employee cover their student,

loan balance. And this is not taxable income for the employee. So if you work for a company that had some type of educational assistance program, talk to HR immediately and see if you qualify to access those funds and if you can instead use that money to cover your student loan debt rather than paying for new educational expenses. Now, the deadline for this is January 1st, so you want to do this, like right now. You want to do this yesterday. This provision in the CARES Act applies to employer payments of student loans that are paid after March 27, 2020, but before January 1st, 2021. So you only have a few more weeks to get this nailed down. But it's not something that's talked about very often.

I think probably largely because not a lot of employers have educational assistance programs to begin with. If you work for an employer that does, this could be a really good opportunity. So check with them. So to summarize, the takeaways from today's episode are, number one, Budget as though you're going to have to start making federal student loan payments in February. Create a budget with that assumption in mind. Number two, don't make any extra payments on your student loans right now, particularly if your balance is $50,000 or less.

Number three, don't take out a private loan and use it to pay off a federal loan. Number four, if you have a federal loan, look at income-based repayment options. Number five, if you have private loans, look at refinancing to a lower interest rate. six, if you work for an employer with an educational assistance program, see if they will pay a portion of your student loan debt. And number seven, if February comes and you still don't have to repay your student loans, continue quote unquote making that payment, but make it to yourself into a savings account so that you'll have additional money saved up. And then in 2021, when we know what the deal is, we know whether or not there's going to be forgiveness. We know when the first

payments will become due. Once those questions are settled and we have that information, you will have a more well-stocked savings account to be able to make a decision from there. Those are the takeaways from today's episode. This is PSA Thursday, airing, as it often does, one day late on Friday. Thank you so much for tuning in. You can find the show notes at Affordanything.com slash PSA Thursday, and to get the show notes delivered directly to your inbox, sign up for free at Afford Anything.com slash show notes. If you want to chat about student loans with other people in the community,

Head to Afford Anything.com slash community. It is a community that we have set up away from social media. It's not on Facebook. It's a private community, away from the noise of social media. It's absolutely free. And you can gather in villages to talk about specific personal finance or financial independence topics. So if you specifically want to talk about student loans or entrepreneurship or debt payoff or retirement planning, whatever particular topic you want to talk about, you can gather inside of little sub-community.

to chat about these issues. So again, that's totally free, available to everybody at affordanything.com slash community. Thank you for tuning in. My name is Paula Pant. This is the Afford Anything podcast, and I will catch you in the next episode.