These are the 5 worst ways to pay student loans during COVID-19.
Here’s what you need to know – and what to do about it.
Many borrowers are asking “Should you pay off student loans during COVID-19?” Your strategy for student loan repayment can have a major impact on how much you spend on your student loans. That’s especially true during the COVID-19 pandemic, which has caused approximately 30 million people to file for unemployment benefits. Whatever you do, make sure to avoid the 5 worst ways to pay off student loans:
1. You don’t recertify your income
If you’re enrolled in an income-driven repayment plan such as Income-Based Repayment (IBR) or Revised Pay As You Earn (REPAYE), you can lower your monthly payment to as low as $0 per month. After 20 or 25 years of monthly payments, you can receive federal student loan forgiveness. Yes, there’s a catch. You will owe income tax on the amount of student loan forgiveness you receive. If you recently lost your job or are struggling financially, the worst thing you can do is to not recertify your income.
Do This Instead: Contact your student loan servicer to recertify your income, which can potentially lower your federal student loan payments. This is especially helpful to anyone who lost their job or has a change of income. Currently, the interest rate on your federal student loans is 0% and you don’t have to make any federal student loan payments through Septemying yober 30, 2020. However, after September 30, 2020, your monthly payment will reset based on your updated income certification.
2. You don’t ask about flexible student loan repayment options.
Unfortunately, the CARES Act – the $2.2 trillion stimulus package to provide financial support to Americans in the wake of COVID-19 – doesn’t provide benefits for private student loan borrowers. Some states have such as California and New York have announced agreements with certain private lenders to pause your private student loan payments. If you lost your job or are struggling financially, the worst thing you can do is to stop paying your private student loans.
Do This Instead: If you lose your job or are struggling financially, your first call should be to your private student loan servicer. Ask about flexible payment options, which may include private student loan forbearance. Many private student loan companies will allow you pause student loan payments during COVID-19. Make sure you understand the financial consequences of any payment option, including how interest is calculated and what is the total financial cost.
3. You don’t request a refund of your student loan payments.
President Donald Trump signed the CARES Act on March 27, 2020. If you made a federal student loan payment after March 13, 2020 (the effective date of the CARES Act), and you didn’t want to make that payment, the worst thing you can do is not request a refund.
Do This Instead: Contact your student loan servicer to request a refund of your student loan payment. Similarly, there’s no student loan debt collection for federal student loan debt in default through September 30, 2020. If your wages or Social Security benefits were garnished for this purpose, contact the Education Department’s Default Resolution Group for a refund at 1-800-621-3115 (TTY for the deaf or hearing-impaired at 1-877-825-9923).
4. You don’t start an emergency fund
After September 30, 2020, monthly payments with your regular interest rate on your federal student loans will resume. Not having a game plan or back up funds to make student loan payments is one of the worst thing you can do.
Do This Instead: This is an incredibly difficult financial time. The idea of an emergency fund may be the last thing on your mind. However, the best thing you can do for your student loans – and financial life – is to build an emergency fund. You can start with $10, $50, $100. Keep in the money in a separate account. If the COVID-19 pandemic has taught us anything, it’s that disaster can strike quickly and aggressively. Protect yourself. You never know when you may need these funds.
5. You don’t make an extra student loan payment (if you can afford)
Most borrowers will simply skip their federal student loan payments through September 30. After all, why pay if you don’t have to? If you have extra funds, and are not pursuing a student loan forgiveness program, this strategy may be one of the worst things you can do right now.
Do This Instead: If you have financial resources, make an extra student loan payment. You can pay any amount. Interest rates on your federal students are 0% now. Every dollar you pay right now will pay off any interest accrued prior to March 13, 2020 and then go directly to reduce your principal student loan balance. Consider it a big financial win.
Helpful Resources: Student Loans
Student Loans: More Options
What’s the best way to pay off student loans? Consider these four options, all of which have no fees: