The clock is ticking. While you may be holding your breath hoping student loan forgiveness is on its way, that won’t pay the bills. Since we don’t know what the future holds, here’s what you should do before September 30, 2021… no matter what shape your finances are in today.
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You may be waiting with bated breath for the student loan forgiveness that President-elect Joe Biden has promised.
But industry insiders say you shouldn’t count on it. After all, it won’t pay the bills.
And just because it’s being heatedly discussed doesn’t mean it’s all that close to becoming a reality. After all, there are many pressing problems the Biden-Harris administration will need to address quickly. This is just one of them.
Biden’s transition team has reiterated their support for $10,000 in student loan forgiveness for each borrower. But it’s likely this will only happen through Congressional action.
Many crucial details about such a plan are still unclear. Such as which loans would qualify and whether an income threshold would apply.
Student Loan Payments Resume September 30th… Prepare Now
Meanwhile, the interest-free payment forbearance that’s been in place since March of 2020 has been extended, and is now set to expire on September 30, 2021.
Federal student loan borrowers don’t have to make payments right now. But payments are set to resume on September 30th.
Even once regular payments resume, the process is expected to be an administrative nightmare, according to a 2020 Department of Education report.[i] That’s because the system isn’t designed to be turned on and off at whim. It’s designed to be ongoing.
While forbearance is still in place, here’s how to prepare personally, based on three possible scenarios.
Scenario 1: You’re experiencing financial hardship because of your student loans.
If you’ve lost your job, it’s normal to get freaked out. But try to keep a clear head and focus on making sensible decisions.
You never want to go into default on federal student loans. Doing so can ruin your finances and your dreams for decades.
A. Focus on paying your rent, groceries, and utilities with cash. Do not put those things on a high interest-rate credit card, just so you can make your student loan payments on time.
B. Call your servicer and ask them to enroll you in one of the following:
- An income-driven plan that will set your payment amount to a percentage of your income, and extend your debt repayments accordingly. If you don’t have a job, your payments could be as low as $0/month. But interest will accrue during this time.
- An unemployment deferment allows you to defer payments for a time. But you must meet one of these criteria:
- You’re unemployed or unable to find a full-time job.
- You are serving in the Peace Corps.
- You meet the government definition of economic hardship.
- You’re on active-duty military service.
- You’re undergoing cancer treatment (or have completed treatment within the past six months).
- You’re enrolled in an approved rehab training program for disabled persons.
- You are enrolled in an approved graduate fellowship program.
C. If you defaulted on your student loans before the pandemic, call your servicer and ask about loan rehabilitation. Every month you spent in forbearance counts toward one of the nine payments required to get your student loan out of default via rehabilitation. Normally, loan forbearance won’t count toward a loan forgiveness program such as PSLF. But during this suspension period, it does.
D. Even some private student loan lenders offer protections for borrowers. So call your servicer, whether your loan is public or private.
E. Apply for unemployment right away when you lose your job, so you at least have some money coming in regularly. Your state’s employment website can tell you how to apply.
F. If possible, try to keep up with at least your interest payments, even as we move beyond September 30, 2021. This will help keep your loan balance from ballooning while you’re unemployed.
G. While you’re applying for jobs, start a side hustle for a change of pace and some extra cash. The sharing economy offers numerous opportunities through apps like TaskRabbit, Uber, DoorDash, InstaCart, and others. These allow you flexibility for interviews and job applications, while still bringing in some valuable cash.
H. Enhance your job-hunting skills by reading books on resume writing, interviewing, negotiating your new job offer, and other parts of job hunting. Here’s our recommended short list:
- Out of Work to Making Money, 21 Comeback Stories Every Job Hunter Should Hear by Anne Emerick and others. Filled with strategies and compelling stories of people in all walks of life who moved from jobless to financially secure.
- The Key to Landing a Job – The Interview: Interview Secrets that Employers and Headhunters Don’t Want You to Know by Michael S. Manahan. All the techniques and strategies you need to ace the interview and get the job you want so you can live the life of your dreams. By an executive who has interviewed more than 1,000 applicants over the past 40 years.
- Knock ‘em Dead: The Ultimate Job Search Guide by Martin Yate, CPC. Updated with the latest job hunting strategies, including how to create a killer resume, network well, ace the phone interview, answer tough interview questions, and more.
- Next Job, Best Job by Rob Barnett. He covers job hunting in the face of the pandemic’s new realities with strategies fit for the times. A blueprint to rewrite your job history, build a compelling resume and LinkedIn profile, and master the job interview.
- How to Write a KILLER LinkedIn Profile – and 18 Mistakes to Avoid: Updated for 2019 by Brenda Bernstein. This is the 14th edition, adapted to LinkedIn’s 2019 interface. She covers the critical importance of headlines, keywords, photos, and more in your LinkedIn profile… and how to create a LI profile that will get you more interviews and the job you want.
I. Tap into your emergency fund. We recommend that you have an “easy access” fund containing three months’ worth of living expenses. This is why. If you have one and you’re out of work, now is the time to use it. Once you’re past this emergency, make replenishing it a high priority.
J. This may also be the perfect time to pick up new job or interviewing skills on inexpensive platforms like Udemy.
K. It may also be the perfect time to cut your living expenses by getting a roommate or renting out a room on AirBnb.
L. Remember that job loss is temporary and this is not the end of the world… even if it feels like it is. Keep putting one foot in front of the other. Apply for unemployment and jobs, work on your side hustle, and plan for next steps with your servicer. This too shall pass.
Scenario 2: Your finances are okay, but not great.
A. If you haven’t lost your job or experienced other financial losses, prioritize repaying high-interest debt like credit cards while your student loans are interest-free.
B. It’s also a good idea to pad your emergency fund as much as possible. Try to get six to 12 months’ worth of living expenses socked away. If there’s anything 2020 taught us, it’s that emergencies can and do happen. And it’s best to prepare for whatever life may throw at you.
C. Use this as a wake-up call to start one or more side hustles that you can use to accelerate your student loan repayments or pay down other debt. Or that you can use as a down payment on a house.
Scenario 3: Your finances are in good shape and you want to repay your loans faster.
This zero-interest period is the perfect opportunity to pay down your student loans faster. It’s an unheard-of opportunity, one that you may never see again during your lifetime.
There are several options for how to do this:
A. Fully repay your student loans during this time (hurry, ends soon!). Contact your servicer for this.
B. Set aside the money you’d otherwise pay toward student loans until the 0% interest rate is about to disappear. Then make a lump-sum payment on your highest-interest loan just before your repayment and interest accrual starts back up. This maximizes your flexibility.
C. If you’re hoping for forgiveness, make all your required payments. But don’t pay off extra till we know more about what relief may be coming our way.
D. Refinance your student loans at record-low interest rates. We recommend fixed rate loans with no prepayment penalty. These are best for budgeting, and still allow you the flexibility to pay them off early.
About Private Student Loans in 2021
Private student loans aren’t entitled to receive federal relief, since they aren’t owned by the federal government.
Contact your lender about relief options if you’re experiencing hardship, just as you would for federal loans. This might include short-term forbearance (likely with interest accruing). Or a temporarily lower payment.
On the other hand, if your finances are solid, consider refinancing to take advantage of today’s super-low interest rates.
Federal student loan borrowers shouldn’t refi privately right now, until we know how potential student loan forgiveness is going to shake out.