Rarely have we heard anything positive as a result of COVID-19 with regards to personal finances, however, those who are paying back federal student loans are catching a bit of a break. The CARES Act stopped all federal student loan payments from March 13, 2020 to December 31, 2020. On Biden’s first day in office, he extended that pause to September 30, 2021. This gives a breather to those facing financial hardship due to the pandemic. It could also be an opportunity to take a bite out of the principal balance of these loans for those who can afford to take it.
The CARES Act reduced the interest on federal student loans during the stoppage period down to zero. Payments made during this interest free time frame, after the interest accrued prior to March 13, 2020 is paid, will go straight toward principal on the loan. With more than 1 in 4 American adults carrying student loan debt, paying off student loans remains a priority for a large portion of the population.
Mara Harperink, Principal Broker at Re/Max Incline Real Estate, just paid off her student loans and celebrated her achievement with a LinkedIn post that generated congratulatory messages from many of her colleagues. Her advice is to take advantage of the current zero interest rate and continue making normal payments. “If you can send extra, even $20 here and there will make a huge difference,” Harperink advised. “My payment was $497 monthly. I’m now using those funds for my investments: stock, 401K, rental properties. It’s very freeing knowing I’m debt free and saving for retirement.”
If you choose to continue to pay your loans instead of taking the payment holiday, you can gain some quick advantages. The interest-free time frame could put more of your payment to work paying down principal, rather than having it be eaten up in interest.
While the CARES Act covers those with federal student loans, it does not cover borrowers of private student loans. However, some states have reached agreements with private lenders to help their residents who are in need.
According to an article in The Motley Fool, “An estimated 92 percent of student loans are federal loans, not private ones.”
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