Student Loan Update: What You Need to Know
According to the latest statistics, there are over 42 million federal student loan borrowers with total outstanding debt exceeding $1.5 trillion. That's trillion with a "T". Those with private student loan debt make up less than 8% of all borrowers and they have accumulated a hefty sum themselves of around $131 billion. There is no doubt that the cost to attend college has become unaffordable for a majority of U. S. families. There is also little doubt that the heavy debt burden that so many graduates find themselves in has impeded other goals such as starting a family, owning a home, or even saving for retirement. Thankfully, since the start of the pandemic in March, the federal government has provided some relief to student loan borrowers by dropping the interest rate to 0%, effectively putting all federal loan borrowers in forbearance. As of this writing, forbearance will continue through September 30, 2021. So, what, if anything, should you do? Let’s review some scenarios and things to consider when deciding if you should continue to pay or perhaps focus your resources elsewhere.
Not All Loans Are Created Equal (Federal vs. Private)
By now, I hope you know whether you have federal student loans (government) or private student loans (banks and credit unions). Federal loans, both subsidized and unsubsidized, are the only loan types eligible for the current 0% interest relief. If you have private loans, you continue to make your regular payments. Don’t fret, however. You may be able to lower your interest rate by refinancing. Shop around different lenders for the best rate, including a bank or institution with whom you currently use or used at one time. They may offer a loyalty discount. Also, many offer a discounted rate if you sign up for auto pay. Never hurts to ask!
If You Can Continue to Pay, Do It
What is the benefit of a 0% interest rate? Every penny you put towards the loan lowers the principal balance by that amount. Best. Loan. Ever. If you have not realized a financial setback and have no other high interest debt, there is no better time to continue making your student loan payments. Perhaps you can even increase it? The key is to automate. If you wait to put what you have leftover at the end of the month, there may be nothing left.
But, There Are Reasons You May Want to Hold Off
Perhaps you are in a different situation. Maybe your job isn’t that stable, your hours have been cut, or your spouse is no longer working. You could have credit card debt, a high interest personal loan, or no emergency savings. All of these situations should take precedence over continuing to make your student loan payments.
Don’t Forget About Taxes!
Student loan interest is an above the line tax deduction meaning it lowers your taxable income dollar for dollar and you do not need to itemize in order to take it. Your MAGI (Modified Adjusted Gross Income), must be less than $70,000 ($140,000 if married filing jointly) to claim the full $2,500. For single filers, it completely phases out at $85,000 and $170,000, if filing jointly. Since interest rates have been 0% since March 13, 2020, it is probable you will have a lot less to deduct in 2020. Prepare yourself for that reality not only for your 2020 taxes, but now, for most of 2021 as well.
Likelihood of Loan Forgiveness
Some democratic legislators, including the President, have voiced support for forgiving some amount of student loan debt. Amounts discussed have mostly been around $10,000, $50,000, or even eliminating the debt entirely (unlikely). The average loan balance is in the $30,000’s, so $10,000, $50,000, or some variation, could have a significant impact, even eliminating the debt for some. Proponents of debt forgiveness argue it would be a boost to the economy because the money spent to pay down this debt could be diverted towards saving and spending. It seems as though the President is leaning towards $10,000, but do not expect this to occur within the next few months. COVID-19 vaccinations and distribution are now the priority. There is a real likelihood of some form of forgiveness getting passed during Biden’s presidency, but the timeframe, amount, and qualifications are still TBD. Stay tuned!
At historic 0% interest rates, this is a unique, perhaps once in a lifetime opportunity for the millions of federal student loan borrowers to make a significant dent on their debt. But, before deciding whether you will continue to pay and what amount, it is vital that you take inventory of your financial situation and determine a debt and savings strategy first. If this seems daunting on your own, a financial advisor or coach can help.