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What Should I Do About My Student Loans?

The CARES Act offers some relief for federal student loan borrowers. Learn whether or not you can take advantage of this benefit over the next six months.

Articles by Fred Egler, CFP®
By Fred Egler, CFP® Financial Planner, Betterment Published Apr. 17, 2020
Published Apr. 17, 2020
3 min read

In late March, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which includes broad relief for federal student loan borrowers as well as other emergency measures to help stimulate the American economy.

With over “45 million borrowers who collectively owe nearly $1.6 trillion in student loan debt,” it’s now the second-highest consumer debt category in the U.S. As more Americans file for unemployment and are unable to make student loan payments, you may be wondering how the CARES Act impacts you.

While everyone’s situation is different, in this article you’ll find broad guidance on common scenarios you may be facing.

  1. What is the new benefit to federal student loan borrowers?
  2. What if I have student loans from private lenders?
  3. How should I use my extra money during this forbearance period?

What is the new benefit to federal student loan borrowers?

Here’s what you need to know:

  • Loan payments are suspendedinterest-free—through September 30, 2020 for most student loan borrowers. Interest is being temporarily set at 0% on federal student loans.
  • The 0% interest applies to the following loans owned by the Department of Education: defaulted and non defaulted Direct Loans, defaulted and non defaulted Federal Family Education Loan (FFEL) Program Loans, and Federal Perkins Loans.
  • Even though the CARES Act was passed March 27th, 2020, the Department of Education decided to make the administrative forbearance retroactive to March 13th. This means that if you made a payment on or after the 13th, you can request a refund of your payment by contacting your student loan servicer.
  • If you currently have auto-debit payments enabled, they will be suspended until September 30th, 2020. If you want to continue making auto-debit payments, you’ll have to contact your student loan servicer to opt out of the administrative forbearance.
  • You can still make manual payments during this time. The full amount of your payments will be applied to your principal balance once all the interest that accrued prior to March 13 is paid.

What if I have student loans from private lenders?

If you are a student loan borrower from a private lender, or your FFEL Program or Federal Perkins loans are not owned by the Department of Education, you are not eligible for the new benefits under the CARES Act.

However, this doesn’t mean you should throw in the towel: contact your student loan servicer, bank, or agency to see if they are offering any relief benefits during this time period.

Finally, stay atop of the news for updates on potential upcoming relief bills—Congress is already considering a Phase Four package where more student borrowers may be eligible for benefits.

How should I use my extra money during this forbearance period?

Depending on your financial situation, this short-term student loan relief presents a couple of opportunities to use your extra cash where you need it most.

Here are five tips you can use to guide your saving and spending:

1. Place it in your main checking account.

Depending on your circumstances, you may need more “immediate” money to purchase things like groceries, medicine, or other unexpected necessities.

We typically recommend keeping 3-5 weeks’ worth of expenses in your checking account on a regular basis, with more during times of uncertainty.

2. Use it to pay recurring bills.

Paying recurring monthly bills can help you avoid incurring any unnecessary fees or additional debt.

If you anticipate having difficulties making a payment, contact any stakeholders as soon as possible to inquire about any alternative payment plans or forgiveness options available.

3. Pay off any high-interest debt.

This can be beneficial in a number of scenarios:

  • You can use extra funds to pay off any other high-interest debt you may have, such as credit card debt. This can help reduce your monthly expenses overall.
  • If you have both private and federal student loans and are not receiving any relief from your private lender, you can use your extra money to pay more of your private loans in the meantime.
  • And finally, if you have a variety of federal student loans with varying interest rates, manually pay the one with the highest interest rate. This strategy can help reduce the amount of interest you pay when the forbearance period ends on September 30th.

4. Put it into your emergency fund.

If, for example, you currently have enough immediate spending money but are worried about your future job security, you may want to place your extra money into an emergency fund.

A low-risk investing account like Safety Net can help you beat inflation rates while shielding you from current market volatility.

5. Invest in your retirement savings.

Finally, you can use your extra cash to invest in your retirement. While market dips can make even the most seasoned investors nervous, history has shown that staying the course while the stock market recovers can benefit you in the long run.

Ultimately, taking advantage of this short-term student loan relief can help you find more financial stability during these uncertain times. If you’re interested in learning more about how the CARES Act might help you, take a look at our guide on the  stimulus checks and how you can make the most of your money.

Contributing Authors

Jeimy Ruiz
Content Marketing Coordinator, Betterment

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