Gennadiy Todd, Financial Advisor
Payments on student loans begin six months after graduation. Early in your professional life, you face several demands on your cash... living independently, building up a cash reserve, saving for a home, saving for retirement, etc. Oftentimes, there are more demands on your cash than there is cash. Amidst the COVID-19 stresses, there are opportunities to better underpin your financial security.
Zero Interest and Payment Deferral – The $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act made several changes for federal student loan borrowers. First, it reduced interest rates on outstanding loans to 0% until September 30, 2020. Second, it defers all payments for the same time period. Under an initial Executive Branch effort, borrowers who wished to defer payments had to contact their loan servicer to request suspension for 60 days, but this legislative effort seems to go farther and may not require as much effort.
WARNING: We understood the initial Executive Branch program risked adversely affecting borrowers pursuing Public Service Loan Forgiveness, or Income Driven Repayment Forgiveness. However, the CARES Act effort seems to allow payment deferral even for borrowers seeking relief under these programs. Given the importance of getting that right, we think it makes sense to confirm your opportunities directly with your lenders.
We understand you don’t need to have been directly impacted by COVID-19 to benefit from these temporary relief efforts, and see two financial planning opportunities…
1) If you wish to shore up your other financial goals, like building a cash reserve, paying down other debts, or saving for a house, the loan deferral lets you direct that cash flow to other goals without a cost. Without interest or penalties, your balances simply freeze until September 30th.
2) If you wish to pay down your student loans faster, consider making payments during this zero-interest time period. All payments are applied directly to your principal balance once all interest accrued prior to March 13th is paid. This effectively reduces your outstanding balance at a quicker pace.
If your student loans are eligible for the CARES Act relief effort, it might be prudent to take advantage of this temporary opportunity and shore up your finances. Conversely, the Act may grant you the opportunity to pay down your student loans quicker. As you begin to analyze the best course of action for you, use us as a resource to help guide you along the way.