For the more than 42 million borrowers on federal student loans, the Covid-19 pandemic has brought unexpected relief: an interruption in payments. The pause on interest accumulation alone saved borrowers about $ 4.8 billion per month, according to the Education Department.
Last March, the ministry suspended most federal student loan repayments and set interest rates at zero. A year and three stimulus bills later, the Biden administration has extended the suspension of payment and the interest waiver until September 30.
As a result, nearly 20 million borrowers currently have their loans in forbearance, according to Mark Kantrowitz, author of “How to Appeal for More Financial Aid in College.”
For Kim Stolow, a 41-year-old clinical therapist living in New Jersey, the hiatus came as she struggled to deal with reduced work and more childcare commitments.
“Mentally, it relieved the pressure,” she says. “Just one less thing to think about.”
As of December 2019, the median student debt borrower was 34, according to the Federal Reserve Bank of New York. Last year, the average federal student loan debt disbursement for graduate and undergraduate students was $ 11,077, according to the Department of Education.
Total student debt outstanding stood at $ 1.56 trillion in the fourth quarter of 2020, up $ 9 billion from the previous quarter.
For some young Americans, the rising costs of higher education have increased their debt load and disrupted their financial lives. Paying student loans and freezing interest allowed them to make ends meet, pay off debts and meet other responsibilities. Some have used this money to accumulate their savings.
There are clues as to where this extra money has gone and where it has not. An increase in credit scores suggests that more young people are paying off other debts.
Pay the bills
Krystal McCain, 29, found that both of her jobs – working as a university activity coordinator and waitress next door – have been affected by the pandemic. In 2020, she realized she was paying more for her student loan than the rent on her apartment.
With her college job on leave and her reduced waitress hours, Ms McCain said without the suspension of loan payments, she would not have been able to meet her basic responsibilities.
“The start of the lockdown was very difficult,” she said. “If all of this hadn’t been interrupted, I don’t know what I would have done. I would have been kicked out. I don’t know how I could have paid the bills.
Ms McCain said the loan hiatus allowed her to pay off more than $ 1,000 in credit card debt. But in August 2020, she celebrated what she felt was an even bigger milestone: opening her very first savings account.
“I feel both extremely embarrassed and incredibly proud at the same time,” she said. “I work in higher education and have a master’s degree, but I was still doing.”
New York Fed researchers said there is a possible link between more people paying off high-interest debt and student loan suspension. Credit reporting firm Experian said the average millennials’ credit card debt fell 11%.
When Jarrod Grim, 35, made his last student loan payment on March 17, 2020, he immediately hatched a plan: As long as the hiatus was in effect, he would divert his student loan payment amount, $ 525, into a separate savings account.
Now, a year later, he has followed the plan.
“Over the past 11 months, I’ve added about $ 5,800 to my savings account,” he said. “By the end of September, I estimate I’ll have a little less than $ 10,000 in savings.”
Initially, Mr. Grim made the decision to increase his emergency savings, preparing himself in case he lost his job.
Mr. Grim has $ 80,000 in student debt, all federal loans and all accrued from his graduate degree in urban planning at Rutgers University. He has consolidated 11 different student loans and hopes to pay off one with the highest interest rate.
Joy Liu, financial coach at Financial Gym, a financial services company, encourages her clients to adopt Mr. Grim’s strategy: to keep spending money on student loans within their budget even if it doesn’t go to loans on time.
“What we’re really trying to do is we never want them to give up the practice of paying them,” she said. The money, she said, can be used to save, make bills or invest – or pay off student loans after the break.
An uncertain future
Not all borrowers have benefited from the interruption in loan repayments. While 89% of student loan borrowers have been helped by the payment freeze, the rest of those who are excluded are borrowers with private loans.
Chandler Perry, 27, a Massachusetts Institute of Technology graduate student, said uncertainty has been a big factor in her decision-making over the past year, especially as she sees her peers benefit from the break. Even with a large scholarship, Ms. Perry has raised over $ 120,000 in private student loans, which continue to earn interest.
Ms Perry, who identifies as black, described the student debt crisis as “another obstacle for minorities.”
While 20% of residents in predominantly black neighborhoods have student loans outstanding, which is higher than for neighborhoods with predominantly white or Hispanic residents, the New York Fed found that the increased cash flow due to the break in loan payments was the lowest among borrowers residing in Black communities.
She is now considering taking out federal loans for the upcoming school year, in part to help pay off her existing loans.
“It’s counterintuitive,” Ms. Perry said. “I repay my loans with my loan money.” She hopes for more transparency from Congress in terms of how long the freeze will last and what to expect in terms of pardon.
Wait and watch
Ms. Liu, the financial trainer, had to convince some people that it is okay not to pay back the loans at this time. For those who know how to manage, the break offers a rare opportunity to be strategic and catch up with other financial goals.
“There is something about the American student loan system that is really triggering it,” she says. “So people are very resentful of their student loans and want them back. Maybe it helps some overcome the mental block that they can’t have children or get married until their student loans are paid off.
Often times, emergencies mean people have no choice but to manage urgent expenses before they prepare for bigger financial milestones, said Mr. Kantrowitz, author of the book on financial aid.
“People shouldn’t feel guilty,” he said. “If you need that money to buy groceries, manage medical bills, or pay other debt, do it. You often have no choice but to do so. ”
—Allison Prang contributed to this article.
Copyright © 2020 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8