Should borrowers be making payments?
The pause on student loan payments and interest has been extended multiple times since it was first established under the Trump administration in March 2020. For cash-strapped grads, it's been a godsend.
Mark Kantrowitz, student loans expert and author and publisher of PrivateStudentLoans.guru, says his analysis of U.S. Department of Education data shows that, in reality, only 1.2% of borrowers have been making payments during forbearance.
However, he admits it’s unclear whether that figure represents borrowers regularly keeping up with their monthly payments, or borrowers who have made at least one payment during the freeze.
Borrowers who have been making payments during the freeze are taking advantage of the 0% interest rate to chip away at their debt and potentially reduce the interest they will owe later. But that strategy has its drawbacks.
“I don't recommend doing that in a couple of circumstances,” says Kantrowitz. “If you're working toward loan forgiveness, you don't want to make payments that aren't required because that reduces the amount of forgiveness you will ultimately receive.”
He adds that borrowers should also prioritize forms of higher interest debt at this time (such as credit card debt), bulk up their emergency fund and maximize their 401(k) contributions.
Lauryn Williams, founder of financial planning firm Worth Winning in Dallas, Texas, says that if you’re on an income-driven repayment plan and you owe more money than you make, paying down your student loans during the freeze is the equivalent of “flushing money down the toilet.”
The federal government offers four income-driven repayment plans, which can see your remaining debt forgiven after making qualifying payments for 10 to 25 years.
Personal loans to get you one step ahead
Graduates may have other priorities
Williams believes most borrowers may have been focusing on other important goals, such as putting a down payment on a home or increasing their overall financial stability.
Student success educator Lamesha Brown, based in St. Cloud, Minnesota, says she and her husband were able to purchase a home for her sister-in-law in Alabama. They’ve since converted the house into a residence for Section 8 voucher users, opened a Roth IRA account and are currently closing on a condo.
Brown graduated with a PhD in college student affairs administration from the University of Georgia in 2019 and has almost $32,000 in student debt from her master’s and doctoral degrees.
She says she grew up with little financial literacy. As a result, it was important for her to concentrate on other financial goals, especially as a woman of color from a low-income, single-parent household.
“I prioritize these goals, because I have to, and it matters for my family. It matters for those who come after me.”
Brown added that she can afford to make student loan payments at this time, but chooses not to.
“As I've navigated my adulthood, I've worked to increase my financial literacy to determine ways that I can create some generational wealth.”
Are Americans prepared to resume payments?
Kantrowitz and Williams both believe the Biden administration will extend the freeze again, since it’s election season.
Williams says half of borrowers are probably unprepared to resume repayments.
“I think that there's going to be real trauma related to … the loan, about the way they've been treated,” she says, adding that some may be banking on future loan forgiveness.
Biden announced in April that his administration was considering student loan reduction, but ruled out $50,000 in forgiveness. More recently, the U.S. Department of Education said it would cancel $5.8 billion in all remaining loans for 560,000 borrowers who attended the now-defunct Corinthian Colleges.
Administration officials say the government is likely to make a decision on loan forgiveness in July or August, The Wall Street Journal reports.
The Federal Reserve acknowledges that some borrowers may be unprepared for payments to resume, citing rising delinquency and interest rates in the second half of 2021.
A lack of education on loans
Williams says many young borrowers may not have grasped how student loans would affect them over the long term.
“Imagine being 17 years old … you're just signing on the dotted line, because you've finished high school. And the next step, as America tells us, is to go to college.”
She adds that there is also a lack of education around how different types of financial aid work.
“I would say the biggest thing is not to ignore your student loans, to get a plan in place,” advises Williams, explaining that students need to look into the various income-based repayment plans.
Coleman explains that many students may not understand what compounding interest is or that higher education isn’t necessarily the best route for everyone.
“When I [was in college], the information that they gave you was this huge packet of information, and they’d say, ‘Here read this.’ And that's essentially a contract.”
However, the student loan pause gave Coleman the opportunity to invest in cryptocurrency, get more technical education and start building a mindfulness program for neurodivergent people of color.
Coleman also testified in front of the Department of Education earlier this year about her negative experience with the University of Phoenix, which made her deeply regret her decision to attend.
“I think that the pause really allowed me to be able to kind of step back and see the full picture, and if there was a collective way to be able to handle this situation,” she adds. “We can start to move the needle on the way that some of these programs and institutions are being governed and handled.”
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