A whole lot of Covid financial relief protections were scheduled to end in December. As expected, some of those money helping tweaks have been extended in 2021. For example, the Biden administration recently extended the mortgage foreclosure moratorium and forbearance protections.
Student Loan Relief Flexibility
On January 20, 2021, various student loan relief measures were extended through September 30, 2021.
Student Loan Interest Rate Set to Zero
Most federally owned student loans have had their interest rate set to zero percent during the pandemic. This continues through September 30, 2021.
The zero percent interest rate is pared with student loan payment suspension. Technically called administrative forbearance, student loan payment suspension allows borrowers to skip student loan payments without late payment penalties, or any other negative effects. If you have lost your job, or are having other financial difficulties during the Covid pandemic, then this is a useful way to help save some money for use toward other things.
However, if you are not having financial difficulties, and are still getting your normal paycheck from your job, this is an excellent opportunity to improve your overall financial health. Although your loan administrator will automatically place your student loans in administrative forbearance and cancel your automatic payments, you have two options.
First, you can make manual payments via your student loan servicer’s website, or other payment method. (Check your bank or other financial institution for ways to make free electronic payments.) Unlike regular student loan payments where a potentially sizable part of your payment goes to paying for interest, 100% of your payment will be used to pay off principal during this time. That is a huge benefit, especially for student loan borrowers paying higher percentage interest rates.
Second, you can opt-out of administrative forbearance. That will turn your student loan payments back on. It does not turn your interest rate back up, and if you miss a payment, there is still no late fee. If your loans become 30-days past due, you will automatically be placed back into administrative forbearance.
Should I Make Student Loan Payments Anyway During The Pandemic?
If your goal is financial independence, paying off your student loans is a big part of that. For many borrowers, especially recent graduates, 30% to 40% of your payment each month might go toward paying interest. But, with rates currently set at zero, each payment you make goes 100% toward principal. That’s like getting an immediate 30% return on your investment. So, absolutely, if you are able, continue making your student loan payments. Not only will every penny go toward principal, but your future payments, once interest rates return to normal, will each cost less in interest each month due to the reduced principal.
Paying on your student loans during the pandemic gives you one of the highest risk-free returns on your investment possible. Take advantage if you can.
Should I Pay My Student Loan or Credit Cards During Covid?
If you can only afford to make payments to one, pay your credit cards. Unlike your student loans, your credit cards will continue to charge you late fees and interest. Even worse, each missed payment will drop your credit rating, which may cost you thousands of dollars or more in the future due to a lower credit score forcing you into a loan with a higher interest rate.
However, if you can make both payments, then make your student loan payment as well.
If you have a high-interest credit card with a balance, pay it with a higher payment first. Your student loan interest is likely deductible, and you aren’t being charged interest or late fees during the pandemic. Paying down your high-interest credit cards, especially if you can pay them off completely, will give you a higher return on your money than paying off your student loans, especially if you have a low interest rate on your student loans.
Do The Covid Student Loan Benefits Apply to Private Loans?
Unfortunately, the Feds only have jurisdiction over the student loans they own. So if you took out your student loans from a private lender, or if you refinanced your student loans with SoFi, or refinanced your student loans with Earnest or other student loan refinance companies, you do not qualify for suspended payments or zero percent interest rates. This is one of the main reasons to be cautious about refinancing your student loans, especially if you are not getting a much lower interest rate.
Student loan borrowers who refinance student loans to save just a few percentage points often regret losing the flexibility federally owned student loans provide. In addition to these temporary Covid financial aids, there are permanent student loan benefits including the ability to suspend your student loan payments for six months, no questions asked, if you ever get into a trouble spot. Be sure to take possible federal protections into account when deciding whether or not to refinance your student loans with private lenders.