The $900 billion Covid stimulus passed without extending student loan forbearance: Here’s what borrowers need to know

Some options aren't in borrowers' “best long-term financial interest.”

Twenty20 | Iryna Vak Vakalyuk

After months of bipartisan negotiations, lawmakers finally agreed on the terms of a massive $900 billion coronavirus relief package, which President Trump signed into law Sunday.

The bill includes another round of stimulus checks, protections for renters facing evictions, and funding to extend federal unemployment benefits, among other aid. But left out of the legislation is a key provision millions of Americans still need: more time to pay back their student loans.

An extension on federal student loan forbearance through April 30, 2021, had been on the table in previous versions of the bill. But lawmakers eliminated that provision in the final rounds of the discussions.

The forbearance period for federal loans originally scheduled to end in December was recently extended through January 31, 2021. As of now, borrowers are expected to restart payments in February.

45 million borrowers are still struggling

Forty-five million graduates owe a combined $1.6 trillion and have an average monthly payment of around $400. And the vast majority of borrowers, nearly 90%, have been taking advantage of forbearance during the pandemic.

The Covid crisis has cut jobs and slashed incomes. As a result, nearly 80% of borrowers say that they don't feel financially secure enough to resume payments until at least June 2021 or later, according to a recent Student Debt Crisis poll of nearly 59,000 U.S. adults. And data shows the struggle is even harder for people of color and essential workers.

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Consider changing your payment plan

If your income has dropped this year, experts say it may make sense to apply for an income-based repayment plan. That can lower monthly payments, although it also increases the time it will take to pay off the full loan amount — meaning you'll ultimately pay more. The plan bases its payment amount on discretionary income, and some plans can drop monthly payments to as low as $0.

"This is not the best long-term solution as it ultimately extends the payback term," Matt Smartt, CFP, a wealth advisor with Henrickson Nauta Wealth Advisors, recently told Grow. "But it can be a good solution in the short term if income is tight."

Borrowers can switch back to a standard repayment plan when their situation improves.

Those who are completely out of work, cannot afford any payments, and don't qualify for a $0 monthly bill on an income-driven plan might consider applying for an unemployment deferment. This plan pauses payments for up to 36 months, while requiring borrowers to reapply every six months, show proof of unemployment benefits, and verify that they're seeking employment.

"If you fall into this group, you do have options," says Kevin Mahoney, CFP, founder of Illumint in Washington, D.C. It's important to keep in mind, however, that some "options aren't necessarily in your best long-term financial interest," since fees can continue to build, including the interest on unsubsidized federal student loans.

Before turning to unemployment deferment, Mahoney suggests people "reconsider alternatives that they previously dismissed, such as cutting back even further on expenses or asking a family member for help. These choices never feel good, but even amid a newly stressful financial challenge, we want to try to protect our long-term financial outlook as well."

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Don't wait for another extension

President-elect Joe Biden has promised to forgive some of the total outstanding student loan debt, and it's possible his administration could pass an executive order after his January 20 inauguration to extend the forbearance deadline beyond January 31.

But if you think you may need help handling all your expenses when the loan moratorium ends, experts say don't wait for another extension. Check in with your finances now and assess your options.

After such a long period of paused payments, borrowers may no longer be used to factoring their loans in with their other expenses. Look at your monthly income and bills, and after paying off the essentials, recalculate how much money you can realistically dedicate to loan repayment.  

"For those currently on tight budgets, the path to the first month of student loan repayments begins with confirming the details," Mahoney says. "Everyone should log in to their accounts and — if  appropriate — call their student loan servicer to confirm their loan balance(s), monthly payment amount, and the bank account from which they will draw the payment."

Through these basic steps, he says, "borrowers are making sure they're giving themselves the best possible student loan repayment situation under the current circumstances."

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