President Donald Trump in early August issued one executive order and three memorandums in response to the financial hardship that many Americans are facing due to the COVID-19 crisis. One of the memorandums extends federal student loan relief through the end of 2020.
Lauren Anastasio, CFP at SoFi, sat down with U.S. economy reporter Sarah Foster during a Bankrate Instagram Live to discuss what you need to know about — and how you should respond to — the memorandum.
Who can take advantage of the memorandum
The student loan deferment program extends interest and payment relief to federal student loan borrowers. Private student loan borrowers do not qualify for the relief period, but private borrowers should always contact their servicer for deferment options, Anastasio says.
“Take the time to research,” she says. “Make sure you call your servicers. Ask questions if you aren’t certain what is eligible. We don’t want people to be skipping payments when their servicer hasn’t agreed to that or assuming that they’re not accruing interest when they are.”
The U.S. Department of Education officially implemented the memorandum on Aug. 21. Anastasio says the most important thing that federal student loan borrowers can do during this time is to be on the lookout for communication from their servicers.
How borrowers can take advantage of the relief
Whether you decide to start chipping away at your loans or you decide to save or invest, how you take advantage of the deferment period depends on your current financial situation.
However, regardless of whether you’re in a position of financial strength or experiencing hardship, Anastasio says that this is “an extremely advantageous situation for anyone with federal student loans.”
Save or invest
If you’re not comfortable with your savings, this could be a great opportunity to build your emergency fund, savings account or even investments. Using the money that would have gone toward paying down your loans to bulk up your savings, investments or retirement accounts could put you in a better financial position down the road.
If you’re unsure about whether you should be making payments or saving right now, Anastasio suggests that you take advantage of the relief if you’re free of high-interest debt and have at least three to six months’ worth of essential expenses in a high-yield savings account.
“If you haven’t accomplished both of those things yet, I absolutely recommend taking advantage of the waiver,” Anastasio says. “Look at it as an opportunity to accelerate your other financial goals.”
You could also put these funds toward other goals, like a house down payment or education.
Pay down existing debt
You can also use the temporary deferment period to pay down existing debt, giving you more opportunities to save.
If you do choose to focus on paying down your existing debt, Anastasio says to “reallocate what you would be putting toward your student loans right now and pay down those credit cards.” Start with the highest-interest debt first and work your way down from there.
Pay down your student loans
If you’re actively paying down your student loans and don’t have any significant high-interest debt, using the no-interest period can help you chip away at that balance faster.
If your financial situation hasn’t been significantly impacted by the COVID-19 crisis — and your primary goal is to reduce your student loan debt — the no-interest period is the ideal time to stay on top of those payments, since the entirety of your payment will go toward the principal.
If you don’t experience any financial hardship or loss of income between now and December, Anastasio recommends that you put those monthly student loan payments aside in a high-yield savings account. That way you’ll be able to earn a return, and at the end of the relief period you can use those funds to make the payments you skipped as one lump sum. “You were making those payments otherwise, but it gives you optionality, which is so unbelievably valuable.”
Refinance your student loans
If you’ve been considering refinancing your student loans, whether or not that’s a smart move depends on your personal circumstances and what type of loan you have.
“Interest rates are unbelievably low right now,” Anastasio says. “Anyone who has private student loans, I do recommend always checking to see what you’re eligible for. If there’s an option to save money, you should take advantage of it.”
While refinancing may be ideal for private borrowers, those with federal student loans may want to think twice before refinancing. It’s an attractive time to refinance, but it’s also difficult to compete with the 0 percent interest on federal loans, Anastasio says.
So, what should federal loan borrowers do if they’re thinking of refinancing? Anastasio recommends taking advantage of the 0 percent interest rates until Jan. 1 and then reevaluating. You can set a calendar reminder for Jan. 1 to remind yourself about the resumption of regular student loan repayments.
The bottom line
If you have federal student loans, the next few months will give you an invaluable tool: optionality. Whether you decide to take advantage of the limited student loan forbearance by saving, paying down your student loans, paying down existing debt or refinancing, this extension could put you on the path to stronger finances.
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