As we know, federally held student loan payments are paused and interest is down to 0% right now due to the CARES Act. This relief is set to expire on Sept. 30, 2020, and most borrowers’ next payments will be due in October.
The HEROES Act is a second stimulus bill currently working its way through to legislation. Signed in by the House of Representatives so far, the HEROES Act would extend the CARES Act provisions for federally held student loans another 12 months. It has been rejected by the Senate, but there is still an opportunity for passing additional student loan relief in their own stimulus proposal. July 2020 has been pegged as the time frame to expect more on this matter.
Will student loan relief continue?
We think it’s very possible there will be an extension of student loan relief. Why? For starters, there is an election in November. We have the presidential election November 3, our House of Representatives (435 members) are up for re-election, as are 35 senators. If payments kick back in, most borrowers’ due date will be some time in October, before we hit the polls. Talk about bad timing.
Another reason we think an extension is possible is we’re not out of the woods yet with this pandemic. I think everyone can agree that COVID-19 won’t be a thing of the past by October 2020. The ongoing effects of the pandemic will correlate with unemployment numbers and our economy as a whole.
In our last newsletter, our founder, Travis Hornsby, said, “Right now I think there’s a 60% chance the student loan freeze extends until Dec. 31 or March 31. I’d say there’s a 20% chance they don’t extend it at all, and maybe a 20% chance the extension goes well beyond March 31.”
What if payments are extended?
What should you do with that money you typically have going toward student loans?
For starters, if you don’t already have a plan for your student loans – hire us! This extension will still be somewhat temporary, so having a game plan for what to do when payments kick back in will be important! In regards to the rest of your finances:
I wrote about this a few months ago stressing that staying cash heavy during this uncertainty is a priority to protect against an income drop or other unexpected expenses. But if payments are extended as far out as another year and your income picks back up or remains unchanged — or even better, your income increases — it’s time to get strategic and get ahead with your additional cash flow.
If you are pursuing PSLF or the longer-term 20 to 25-year forgiveness on an IDR plan, a payment extension makes the total cost of your overall repayment less. As long as you were in repayment as of March 13, 2020, these months of payment-pause due to the CARES Act COUNT towards your forgiveness timeline and we’d expect the same terms for an extension.
If your loans were in forbearance/deferment before March 13, 2020, you’re not out of luck. Studentaid.gov clarified that you can re-enter “repayment” under your IDR plan keeping your payments suspended AND have these months still count towards forgiveness by either calling your servicer or go to: https://studentaid.gov/app/ibrInstructions.action and either recalculate your payment, apply for an IDR plan, or switch IDR plans.
Here are your top priorities if student loan relief is extended:
1. Pay off credit card debt
I’m actually switching up the order from my last post and prioritizing paying off credit card debt first if student loan payments are extended past 9/30/2020. Use your own judgement and assess your risk tolerance here on how secure your income is and if you think staying more cash-heavy should be more of a priority for your situation, but if income stability is solid going forward – get credit card debt out of the mix ASAP.
With the student loan payment pause possibly getting extended, you will have more cash flow to throw towards credit card debt for a longer period of time. Credit card debt is the most expensive debt to carry, and since student loan interest would be at 0%, prioritizing what’s costing you more money per month is a smart decision.
2. Establish your emergency fund
I’m still preaching it: Having your emergency fund established is extremely important. Don’t skip this step. Six to 12 months of living expenses should be kept in savings. These savings are your first line of defense if your financial situation changes or something unexpected comes up that’s not budgeted for in your monthly cash flow. If you’re a business owner, you may need 12 months’ worth of expenses or more.
Living expenses such as rent or mortgage bills, utilities, food, insurance premiums, healthcare, transportation, and debt obligations, are absolutely necessary and are definite even if you experienced a job or income loss.
I typically recommend putting this savings somewhere “out of sight, out of mind” that way it’s not as quick to transfer money back into checking for a non-emergency. Higher yield savings accounts are ideal (you’ll earn a little more on your money sitting on the sidelines!), typically you’ll find these being online vs. brick & mortar. Since our economy has taken a hit though, so have these higher-yield savings percentages. You should still be able to snag something above 1% however.
Once your emergency fund is in a good place, move on to the next priority.
3. Make sure you are saving for your long-term future
To save for the future, start with contributing 5% or more to your retirement account. If your employer has a matching opportunity, take advantage all the way up to the match.
Also start with a minimum of $100 a month into a non-retirement account. For those of you who are pursuing longer-term IDR forgiveness, this savings account is your “tax bomb” account.
Why would I suggest prioritizing saving over paying off all your other debts first? It comes down to the fact that your financial independence comes down to you and your savings rate.
You need to strike a balance between paying off debts and saving, and that balance is even more important when a debt is a lower-interest, non-asset-backed debt. Focusing a large amount of your available cash flow on student loans doesn’t return anything to you or build equity, and typically student loan interest rates are below long-term market return averages.
4. Accelerate other debts with an interest rate
Interest rates higher than 5% to 7% should be prioritized. After your credit cards are paid off, an emergency fund is established, and your savings rate is in a good place, pay down any debts that have higher interest rates. Again, use this time to pay off debts that are costing you now vs your federal student loans that would be at 0% interest.
To help reduce the cost over time of your private student loans, consider looking into refinancing to lower your interest rate and adjust your payment terms. One way you can do that is to apply through our cash-back refinancing links.
5. Increase retirement savings
In step 3, we prioritized putting a minimum of 5% toward retirement and $100 a month toward your nonretirement investment account, but that will likely not be enough to reach your goal of retiring or being financially independent as soon as you’d like to be. Consider interviewing a financial planner.
We recommend working with a Certified Financial Planner (CFP®). If you want a place to start, you can book a free introductory call with our referral partner Buckingham Wealth Management.
6. Save for short-term goals
What are your short- or intermediate-term financial goals? If you haven’t already, start making a plan to save for those things now. Your high yield savings account could be a great place for this savings if within the next few years.
Your brokerage account could be a good place for more intermediate-term goals 5+ years out to have some market participation. Betterment is a good option to consider if you want a digital advice platform for a relatively low cost (referral link: https://www.studentloanplanner.com/get/betterment).
If you go through that Betterment link above to open an account, you can get 1 month to 1 year managed for free depending on how much you initially deposit.
7. Accelerate your private student loans
This could have fallen under priority #4 if your interest rates on your private loans are higher than 5-7%. If not, it’s important to not neglect savings as you pay off your student loans, that’s why this is lower on the priority totem pole. After you have prioritized your savings though, extra cash flow can go towards eliminating your private student debt as quickly as possible.
8. Accelerate your federal student loans, if your plan is to pay these off
Now could be a good time to make your dollars go a little further on your 0% interest federal loans once you’ve paid off all debt that is costing you money. I recommend not making a payment to your federal loans until before the payment relief provisions are lifted though to preserve your options with that cash as long as possible.
9. Start saving for your children’s education
Saving up a college fund is lower on the totem pole if your finances aren’t in order yet. But if everything is on track, then saving for your child’s education could be a good spot for extra money to go.
10. Splurge money
Save up and spend some money on something that makes you happy!
If you’re unsure about your student loan repayment strategy and what you should be focusing on this year and into next year, schedule a consultation with our experts. We’re here to help you!