The Department of Education paused payments on student loans beginning in March 2020 due to Covid-19. President Trump took three steps with his executive powers to ease the burden on 37 million student loan borrowers.
What are these three steps?
1. No student loan payments until December 31, 2020.
2. Zero percent interest rate on the loans during this period.
3. No debt collection calls for student loan payments.
President Trump paused student loan payments through the CARES Act until December 31, 2020. This means that student loan borrowers may have to start making payments from January 2021 onwards. There is no official confirmation regarding the extension of the student loan debt relief plan. The government has not yet been able to finalize anything on the next stimulus plan. Hence, it is not clear if students can avoid making payments in 2021 as well.
Should you make extra payments on student loans?
The current scenario states that you can avoid making payments on your student loans until December 31, 2020. Chances are high that you have not made any payments on your student loans in the last nine months. You are already out of the habit of making monthly payments on your student loans. Therefore, the idea of making extra payments on your student loans before January 2021 is less likely to come to mind.
However, student loan advisors don’t share a similar sentiment. They feel that students should start making payments on their loans during this period due to the following reasons:
1. The interest rate is zero percent at present: The interest rate on Federal student loans is zero at this point. It means that students do not have to make any payment towards the interest, and they can save money. As of now, the 0% interest rate on student loans ends on January 1, 2021.
2. It’s high time to be financially prepared: It is better to analyze your payment plan and explore ways to pay off student loans as soon as possible. It will help you avoid getting caught off guard and get into fresh financial trouble in 2021.
3. You can pay off the principal amount quickly: The outstanding balance on student loans is not increasing right now. Thus, any payment you make will go to the previously accrued interest first. The rest of the amount will go towards the principal balance. So if you make extra payments now, you can get rid of student loans faster.
Word of wisdom – Wise will rejoice and pay off student loans before January 2021. Foolish will not make payments on student loans and will repent next year.
Money-savvy students will take advantage of this golden opportunity and pay off student loans with the extra cash they have in their checking accounts. The biggest challenge in repaying education loans is accumulating interest. This prevents borrowers from cutting down the principal balance.
The CARES ACT has made it easy for students to kick off student loan debt and save dollars on interest.
What is likely to happen with student loans in 2021?
Financial experts are worried about the student loan payment scenario in 2021. They feel that millions of student loan borrowers will apply for debt relief since their economic condition has not yet recovered. It may take a year or two to get back on the right financial track. The education loan system will be busy handling applications for borrowers who are in financial hardship.
What if you don’t have money to make extra payments now?
Covid-19 has affected thousands of students and workers worldwide. If you have suffered from a job loss or received a pay cut, then it is hard for you to make extra payments on your student loans now. However, you should still try to pay off your student loans fast.
Steps that you can take now:
- Calculate how much you owe on your student loans.
- Pay at least the minimum amount on your student loans.
- Get a side hustle to increase your income and make extra payments on student loans.
- Lead a frugal lifestyle to generate free cash for paying off student loans.
- Reduce your expenses to increase your savings. Use it to repay your loans.
Your goals with student loans:
- Your primary goal is to eliminate your student loans before the regular interest rate kicks in.
- If you cannot achieve your first goal, then at least try to reduce your principal balance to some extent.
Still, if you can’t make payments, then you can apply for a deferral or a different repayment plan. You can also consolidate your student loans or opt for an income-driven repayment plan.
How can you make extra payments on student loans?
There are two simple ways to make extra payments and eliminate student loans quickly. Let’s discuss them briefly.
1. Pay more than the minimum amount on your student loans.
Unlike others, if you have made regular payments on your student loans this year, then pay a little extra in December. Give that extra effort to cut down your principal balance as much as you can. Believe me, you will thank yourself in the next year.
Use a student loan payoff calculator to calculate how much you can save by making extra payments on your student loans. An extra payment of $100 on a $50,000 student loan with an 8% interest rate and 10-year repayment term can help you save around $4900. You will also get out of debt 1.99 years earlier. See also: Paying Off Debt: Snowball vs Avalanche Methods.
2. Make a lump-sum payment and eliminate your student loans.
If you have extra cash in your checking account, then use it to make a lump sum payment on your student loan. Use your bonus, financial windfall, and tax refund to repay your loan. It would help you to save thousands of dollars. Plus, you will also get rid of your loans early.
Read: How A Recent College Graduate Paid Off $26.7K of Student Loans In Just 10 Months
Of course, you need extra cash to eliminate your student loans. Explore all the resources to make money to get rid of this debt burden. Remember, there is no prepayment penalty. So, there is nothing to lose.
The bottom line
Don’t hope for a miracle in 2021. It’s wrong to expect that Biden or Trump (whoever takes office) will pause student loan payments for another six to seven months next year. We shouldn’t hope for something big amidst the political turmoil in the country. Even if Biden forgives a portion of your student loan, you do not have any idea about the tax implications. Again, the consequences of not paying off your student loans can be harmful. So, be careful.
The countdown has begun! Create a budget, make extra payments, pay off your student loans, and simplify your finances in December.
Author Bio: Valentina Wilson is a writer. She loves to analyze personal financial matters and help others manage their finances in a better way. Traveling is also her passion. She follows more animals on Instagram than humans and her greatest achievement is her blog. She believes that transparency and conversations about money are essential in gaining control of finances.. To connect with her, go to her LinkedIn or visit her blog bestdebtconsolidation.org
Financial freedom begins with good habits.
Rebecca & Tiago, theloadedpig.com