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Federal Student Loan Debtors: Right Now, You Have Options

Student debt. UGH. Approximately 42 million Americans owe the federal government money for an education. It’s been a big talking point of politicians for a while, because it takes a big chunk of money out of the direct economy.

Thankfully, legislators recognized that Americans getting crushed by the COVID-19 pandemic lockdowns would not also be able to handle the monthly payments on their student debt and wrote relief into the CARES Act. Since March 27th of 2020 the interest rate on federal student debt (just federal, not private, very important distinction) has been at zero and monthly payments have not been required.

The provision was supposed to expire in September of last year but it has been kicked down the road three times. As of now, it will expire on September 30th, 2021.

Every aspect of the pandemic response has been a wild experiment in economic theory and allowing debtors to pause their student loan payments is no different. There are going to be all kinds of unintended consequences — both good and bad — from this and we’re already seeing some of it. Take a recent analysis on credit scores: removing the burden of payment made a significant improvement in the credit scores of student loan borrowers in the Millennial age range. Although this improvement doesn’t necessarily mean financial stress also improved, it is hard evidence that student debt is burying some Americans.

Whether your credit score falls below 600 or not, there are a couple ways you can spin this payment holiday to your benefit.

The easiest thing to do is to just keep on paying as if nothing has changed. Since interest rates were dropped to nothing, everything you pay is knocking down principal — the money you actually borrowed. Even though you aren’t changing your habit, you are doing more to pay down your debt. This will result in the debt being paid off faster than anticipated.

The second option is to stop making any payments at all. You aren’t being charged any interest and you don’t have to pay anything. This was written in specifically for borrowers whose employment was hit by the pandemic. It’s one more expense struggling families can put off for now. But even if you’re not struggling, you can take advantage of this option. This is an amazing opportunity to build up an emergency fund or save for a home downpayment. Some financial advisors argue that everyone should go this route since federal debt forgiveness was a key point of President Biden’s campaign and serious conversation was going down on Capitol Hill about it. The logic goes: if it’s going to be forgiven anyways, why pay at all? (I have a lot of conflicting thoughts about this strategy. This is one of those times were personal finance becomes truly personal.)

And keep in mind: this isn’t an either/or situation. You may choose to continue making payments, but with a lesser amount than you would normally be required to shell out.

There is a third option available to people who have been paying in but want a do-over: you can request the money back. Seriously. Any payment made to a federal student loan since March 13, 2020 can be requested back. To do so, you’ll want to make a list of exactly how much was paid and on what date(s) payments went out. Call your loan servicer (a list can be found here) and ask for a refund on those specific payments. It will probably take a few weeks to get the money back into your account; keep an eye on it! Once the funds have been reclaimed, you can use them for anything you want. Some smart options would be to build up an emergency fund, contribute to an IRA (tax credit!) or Roth, contribute to a Health Savings Account (tax credit!), contribute to a child’s 529 account (another tax credit!). This is also an opportunity to pay down high-interest debt, if you have it. Or maybe one solid year of working from home has made you realize it’s time to get some bigger digs; these funds could help you compete in this nutty housing market. The opportunities are endless. Just be smart, please.

Of course, if you’re reading all of this and your head is spinning at the possibilities, helping clients figure out how student loans fit into their financial picture is one of the things Valkyrie does. Go ahead and schedule a free 45 minute conversation if you think some expert guidance could help you.

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