Paying for College

Managing Student Loans During COVID-19

You may be eligible for deferment if you receive unemployment benefits or are unable to find a full-time job.

COVID-19 has taken a financial toll on millions of Americans, but it has been particularly tough on millennials. Even before the pandemic led to an economic downturn and widespread unemployment, many were struggling to pay their student loans. A survey conducted earlier this year by the Harris Poll on behalf of TD Ameritrade found that 42% of millennials age 29 and younger feared that their student debt would prevent them from ever becoming financially independent from their parents.

Earlier this year, Congress gave borrowers with federal student loans some relief. The CARES Act automatically suspended payments through September 30, 2020, with no interest accrual on loan balances. In August, President Trump announced executive orders that extend relief through the end of 2020—but action by Congress could supersede the executive orders. In case lawmakers grant no further relief, you should put a plan in place to cover your payments come October.

Help for federal loan borrowers. If you were making automatic payments before the suspension, ensure that they restart in October. Besides running the risk of a late payment, you’ll miss out on an interest rate discount of 0.25 percentage point if you don’t use autopay.

If you think you’ll be unable to make payments after the suspension, contact your loan servicer right away. One option is to use an income-driven repayment plan, which aims to keep your payment affordable by basing it on your earnings. If you already use an income-driven plan and your income has declined significantly, you can ask your loan servicer to recertify your income and recalculate the payment, which may dip as low as $0. Because you’ll continue progressing toward loan forgiveness or retiring your loan balance, income-driven repayment is “generally a preferable route as opposed to deferment or forbearance,” says Andrew Pentis, of Student Loan Hero, a site that helps borrowers manage student loans.

But if an income-driven plan won’t lower your payments to a comfortable level, deferment and forbearance, which allow you to temporarily stop or reduce payments, are your best options. You may be eligible for deferment if you receive unemployment benefits or are unable to find a full-time job, or work full-time but have earnings that are less than 150% of the poverty guideline for your family size and state of residence (for more information, go to ASPE for poverty guidelines). You can receive economic hardship deferments for up to three years. If you have a federal direct subsidized loan, you won’t have to pay interest that accrues during a deferment period (you will owe interest on unsubsidized loans).

During a forbearance, interest continues to accrue. Lenders are required to provide forbearance in certain situations, such as when the total amount you owe monthly on federal loans is at least 20% of your monthly gross income. If you’re not eligible for a mandatory forbearance, you can request a general forbearance, which lenders may grant if you’re dealing with financial difficulties, high medical expenses or other hardships. Forbearances are granted for 12 months at a time and may be renewed on request.

Strategies for private loan borrowers. Although not legally required to do so, many private lenders have been cutting breaks, too. Upon request, some are offering three months of forbearance because of the COVID-19 emergency. If you suspect you won’t be able to keep up with payments after a relief period, contact your lender to see whether it will grant an extension or some other loan modification.

Most Popular

How to Use Your Estate Plan to Save on Taxes While You’re Still Alive!
estate planning

How to Use Your Estate Plan to Save on Taxes While You’re Still Alive!

Upstream basis planning is a trust strategy that can save wealthy people on their capital gains taxes and income taxes associated with highly apprecia…
July 3, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
5 Ways to Prepare for a Recession
recession

5 Ways to Prepare for a Recession

The signs seem to be pointing in one direction these days, so if you’re worried about being ready for a recession, consider taking these five measures…
June 28, 2022

Recommended

11 Education Tax Credits and Deductions for 2022
Tax Breaks

11 Education Tax Credits and Deductions for 2022

Whether you're saving for college, currently paying tuition, or dealing with student loan debt, there's probably an education tax break that can help …
June 30, 2022
When Will Student Loans Be Forgiven?
Paying for College

When Will Student Loans Be Forgiven?

Millions of Americans are waiting for the Biden Administration’s next hint, which could come later this summer, at how he’ll address the student loan …
June 27, 2022
Taxes on Unemployment Benefits: A State-by-State Guide
state tax

Taxes on Unemployment Benefits: A State-by-State Guide

Don't be surprised by an unexpected state tax bill on your unemployment benefits. Know where unemployment compensation is taxable and where it isn't.
June 23, 2022
How to Qualify for Public Service Loan Forgiveness
Paying for College

How to Qualify for Public Service Loan Forgiveness

The Department of Education revamped the Public Service Loan Forgiveness program started under the Bush administration. Here's how to see if you quali…
June 1, 2022