About the author: Lamar Watson, CFP®, is a Fee-Only Financial Advisor in the Washington, D.C. area that works with clients virtually across the country. Lamar's work with his clients focuses on budgeting, employee benefits, paying down debt, buying their first home, and investing. Lamar is the Founder of Dream Financial Planning, a virtual fiduciary financial planning firm specifically designed to help young professionals and minorities take control of their finances and fulfill their dreams. Feel free to schedule a complimentary consultation to learn how we use the DREAM Financial Planning Process ™ to help our clients achieve their goals.
Student loan debt reached $1.48 trillion in America by the end of 2019, with approximately 45 million borrowers across the United States.1 Amidst the COVID-19 pandemic, many Americans have experienced financial instability. This means that for 45 million Americans, paying down student loan debt may be harder than ever before.
Last year, the CARES Act was signed into law on March 27. While this stimulus package provided a wide array of assistance for families and businesses, it also made some important changes to assist federal student loan borrowers. Through the end of September 2020, federal student loan payments were suspended, and no further interest was accrued. This date was extended twice, initially until the end of December and again until the end of January 2021.2
Biden’s Executive Order
President Bident took office on Jan. 20 and, in a historical move to combat several ongoing crises across the country, signed 17 executive orders. One of these orders requested the Department of Education continue to put a pause on student loan repayments amidst the continuing pandemic.
As legislation continues to change regarding COVID-19 and student loan repayment, we’ve provided the answers to a few important questions regarding student loan debt during the current pandemic.
Question #1: Are Interest & Payments Suspended on All Student Loans?
The suspension of payments applies only to student loans that are held by the federal government. However, your FFEL (Federal Family Education Loan) lender or school may have suspended interest and payments voluntarily, but they are not required to do so.
In regards to your federal student loans, your servicer will suspend all interest and payments through September 30, 2021.2
The federal moratorium does not apply to private student loans that are owned by banks, credit unions, schools, or other private entities. If you are trying to suspend payments to these institutions, you will need to contact them and find out what your options are.
Question #2: Should I Apply to Suspend My Payments or Interest?
Until September 30, 2021, there will be no interest accrued or payments due for federal student loans.2 No action is required on your part, as these payments will be stopped automatically.
Question #3: What Should I Do if I’m Behind on Payments?
On March 25, 2020, the Department of Education announced that it would not be withholding federal tax refunds, Social Security payments, or garnishing wages from those who have defaulted on their federal student loan payments.2 Additionally, private collection agencies contracted by the government will put a pause on attempting to contact defaulted borrowers. These changes will continue to be in effect through the ongoing COVID emergency period.
Any defaulted federal student loan will not collect interest until September 30, 2021.2
As the pandemic continues into 2021, you’re likely experiencing a certain level of financial stress. Continuing to make regular payments to your federal student loans can be beneficial in the long-run, but it’s important to know your options continue to change amidst this federal emergency. If you’re unsure whether to stop payments or not, get in touch with your financial advisor first. Together, you can make a game plan moving forward.
Question #4:What Should I Do with My Extra Cash Flow?
The pause on Federal Student Loan payments couldn't come at a better time for those who might have lost their jobs or had their income negatively impacted. I work with several clients in their 20s and 30s with large student debt balances. I understand that every situation is different, and this is a decision that should be part of a well-thought-out Financial Plan. If you're working with a Financial Advisor, please reach out to them to see what makes the most sense for your personal situation. If you're not working with a Financial Advisor, feel free to reach out and schedule a Complimentary Consultation to see if we can help.
- Pay off other high-interest debt such as credit cards - Paying off high-interest debt first makes a lot of sense. I've had few people ask about investing while they're carrying a balance on a high-interest credit card, and it just doesn't make sense to me. Think of it this way. If you have a credit card with a 15% interest rate, paying it off is the same as making 15% in the stock market. That's at least 5% higher than the long-term historical return of a 100% equity portfolio. Don't borrow money at 15% or higher to invest and get a lower return.
- Establish Emergency Fund - If you don't have an emergency fund, use this extra cash to establish one. I recommend that my single clients maintain an emergency fund of at least 6 months worth of expenses. If you're a dual-income couple, you should maintain a minimum of 3 months worth of expenses. If my clients have the ability, I'd like them the double my minimum recommendations. As a reminder, this money should not be invested in the stock market but kept readily available in a savings or money-market account.
- Put it towards other goals - The young professionals I work with are often balancing several goals. The major goals they're saving for include saving for their first home, a wedding, or planning to start a family. Putting extra savings towards these goals could be worthwhile.
- Invest in your 401k - If you're not contributing enough to your 401k to get the full employer match, this could be a great opportunity to increase your contributions and take advantage of free money from your employer.
- Contribute to a Roth IRA - If your income is under $124,000 for 2020, you should be able to contribute the $6,000 max to a Roth IRA. You have until April 15th, 2021, to make contributions for the tax year 2020. Visit here to view a table with income phaseouts and contribution limits.
Dream Financial Planning Process ™
Whether you're managing student loan debt, starting a family, or considering buying your first home, the DREAM Financial Planning Process™ is tailored to the unique needs of busy professionals in their 30s and 40s. This process focuses more on short-term goals while you grow and evolve in your personal and professional life. If you're looking for guidance on Financial Planning, optimizing employee benefits, budgeting, student loans, and managing your 401k or investments, we can help.
With uncertainty surrounding the economic stability of our country, it's okay to have fears and anxieties surrounding your own savings and investments. The most productive course of action from here is to reach out to Dream Financial Planning (or whoever your trusted advisor might be) and discuss your options. It's easy to have knee-jerk reactions when it feels like the bottom is falling out, but it is imperative to make decisions using research-backed data and a level head. If you'd like a Complimentary Review and risk assessment of your investment portfolio, feel free to send me an e-mail.
On the first Thursday of every month, I send out a monthly newsletter with tips and tricks to help you manage your finances. Will your portfolio allocation lead to a $100,000+ mistake? In The January Newsletter, I discuss the benefits of an aggressive portfolio allocation for those in their 20s and 30s. There's also an article from The Wall Street Journal where I discuss the benefits of Flex Spending Accounts. Last but not least, there's a blog post about The Breakdown On Capital Gains & Taxes and Vanguard Portfolio Allocation Models.
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Disclaimer: Dream Financial Planning, LLC does not warrant that this information will be free from error. None of the information provided on this website is intended as investment, tax, accounting, or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. Under no circumstances shall Dream Financial Planning, LLC be liable for any direct, indirect, special, or consequential damages that result from the use of, or the inability to use, the materials in this site, even if Dream Financial Planning, LLC or a Dream Financial Planning, LLC authorized representative has been advised of the possibility of such damages. Please consult with your own advisor before making any changes to your Financial Plan, Investments, or Insurance coverage.