For the more than 42 million federal student loan borrowers, the Covid 19 pandemic brought an unexpected relief: a pause in payments. According to the Department of Education, the pause in interest addition alone has saved borrowers about $4.8 billion per month.
Last March, the Department suspended most federal student loans and set interest rates at zero. A year and three stimulus packages later, the Biden administration extended the suspension of payments and interest deductions until June 30. September.
According to Mark Kantrowitz, author of How to Apply for Extra College Financial Aid, about 20 million borrowers now have deferred payment loans.
Mentally it took the pressure off, says Kim Stolow about the student loan suspension.
For Kim Stolow, a 41-year-old clinical internist living in New Jersey, the break came as she struggled with a decreasing workload and increasing responsibilities for children.
Mentally it took the pressure off, she says. One less thing to think about.
According to the Federal Reserve Bank of New York, in December 2019, the median student debt borrower was 34 years old. Last year, the average debt for undergraduate students was $11,077, according to the Department of Education.
Total student debt was $1.56 trillion in the fourth quarter of 2020, up $9 billion from the previous quarter.
For some young Americans, the rising cost of higher education has increased their debt and disrupted their financial lives. The freeze on repayments and interest allowed students to make ends meet, pay off debts and meet other obligations. Some used the money to build up their savings.
There is evidence of the use of the extra money. The increase in credit scores indicates that more young people are paying off other debts.
Crystal McCain noticed last year that she was paying more for her student loan than for her rent.
Payment of accounts
Crystal McCain, 29, said the pandemic has affected both her job as an activities coordinator at the university and her part-time job as a waitress. In 2020, she discovered that she was paying more for her student loans than for her rent.
McCain said that without the suspension of loan payments, she would not be able to perform her basic duties, as her job at the university is on leave and her hours as a waitress have been reduced.
The beginning of the lockdown was very difficult, she says. I don’t know what I would have done if this hadn’t been postponed. I would have been kicked out. I wouldn’t know how to pay the bills.
McCain said the credit interruption allowed her to pay off more than $1,000 in credit card debt. But in August 2020, she celebrated what she believes is an even bigger milestone: opening her first savings account.
I feel incredibly embarrassed and incredibly proud at the same time, she said. I work at a university and have a master’s degree, but I barely make ends meet.
Researchers at the New York Fed say there is a possible link between the increase in the number of people paying high interest rates on their debt and the breakup of student loans. The average credit card debt of millennials is down 11%, according to credit company Expian.
Jarrod Grim converted the amount of his student loan to savings.
Building up savings
Then Jarrod Grim, 35, on the 17th. March 2020 made his last student loan payment, he immediately made a plan: During the break, he deposited the amount of his student loan, $525, into a separate savings account.
Now, a year later, he has realized his plan.
In the last 11 months, I’ve put about $5,800 into my savings account, he says. I estimate that I will only have $10,000 in savings by the end of September.
First, Mr. Grim increased his emergency savings to prepare for the loss of his job.
Mr. Grim has $80,000 in student loan debt, all federal loans and all accrued for his degree in urban planning at Rutgers University. He has combined 11 different student loans and hopes to pay off one of them with the highest interest rate.
Financial Gym financial coach Joy Liu encourages her clients to follow Mr. B.’s strategy. Climb to assume: continue to set aside funds in their budget for student loans, even if they are not currently being used for loans.
What we’re really trying to do is we never want them to stop paying, she said. The money, she says, can be used for savings, bills or investments – or to pay off student loans after the holidays.
Chandler Perry said she is considering taking out federal loans for the next school year, in part to pay off existing loans.
Not all borrowers benefited from a break in their loan repayments. While 89% of student loan borrowers received relief from the payment freeze, the remaining borrowers were private borrowers.
Chandler Perry, 27, a doctoral student at MIT, said uncertainty has been a major factor in her decision-making over the past year, especially when she saw her colleagues taking advantage of the break. Even with a large scholarship, Perry has accumulated more than $120,000 in private student loans, on which interest continues to accrue.
Perry, who identifies as black, described the student crisis as another barrier to minorities.
While 20 percent of residents of predominantly white or Latino black neighborhoods have student loan debt, which is higher than residents of predominantly white or Latino neighborhoods, the New York Fed found that the increase in cash flow resulting from the credit interruption was lowest for borrowers living in black neighborhoods.
Tuition at American public universities has nearly tripled since 1990. While President Biden tries to ease the burden on some students, experts explain how federal financial aid programs may actually contribute to rising costs. Photo: Story block
She is currently considering federal loans for the next school year, in part to repay her existing loans.
It doesn’t make sense, Perry said. I pay back my loans with my loan money. She hopes for more transparency from Congress on how long the freeze will last and what can be expected in terms of waivers.
Wait and see
Ms. Liu, the financial coach, had to convince some people not to repay their loans. For those who can stand it, the break offers a rare opportunity to be strategic and catch up on other financial goals.
There’s something about the American student loan system that really triggers, she says. So people hate their student loans and want to get rid of them. Maybe it will help one or two people get over the mental block that they can’t have children or get married until their student loans are paid off.
Often, people in emergencies have no choice but to do the immediate spending first before preparing for the big money limit, said Kantrowitz, author of Financial Aid.
People should not feel guilty, he said. If you need the money to pay for groceries, medical expenses or other debts, do so. Often you have no choice but to do that.
-Allison Prang contributed to this article.
E-mail Amber Burton at Amber.Burton@wsj.com and Julia Carpenter at Julia.Carpenter@wsj.com.
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frequently asked questions
What happens to student loans if you take a gap year?
Private Education Loans When you take out a term loan, your loan starts with a grace period. If you return to school before the grace period expires, depending on the lender, it may be reset as if it was never used.
How long can you go without a student loan?
Inform your lender if you are likely to experience difficulties in repaying your student loan. If you do not pay your student loan within 90 days, the debt is classified as delinquent, which will negatively impact your credit score. After 270 days the student loan is unpaid and can be handed over to a collection agency for collection.
What happens if you never repay your student loan?
Never pay off your student loans, it leads to defaults and damages your credit history. After 60 days, you’ll see a 60-day late payment fee on your credit report, along with a new 30-day late payment fee and the associated late payment fee. … And so on, every 30 days.
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