Millions of borrowers will face ‘real trauma’ as the student loan freeze ends in a few short weeks
After nearly three years, millions of Americans will welcome the new year with the return of an old familiar burden: their student loan payments.
For Alphi Coleman, who is saddled with nearly $90,000 in federal and private student debt, the loan freeze gives her time to unplug and invest in herself.
“I can always make money; I can’t always have more time,” she said. “I can create experiences and create space and time for the people I hold dear.”
A report from the Federal Reserve in May found that nearly 60% of students took out zero loans on their federal loans between August 2020 and December 2021. Some experts indicates that the real number is even higher.
Coleman, a military veteran and founder of the personnel consulting firm Aurelian Black, was able to use government support for veterinarians to cover some of the costs of attending the University of Phoenix. from 2011 to 2018.
However, she said, the education is not worth the financial burden for her.
Do not miss
-
If you owe $25K + student loans, there are ways to pay them faster
-
Worried your cash is trash? It’s a 4 simple ways to protect your money against white hot inflation
Some shouldn’t bother paying now
The moratorium on student loan payments and interest has been extended several times since it was first established under the Trump administration in March 2020. For students who are short on cash, it’s is a gift from heaven.
Mark Kantrowitz, student loan expert and author and publisher of PrivateStudentLoans.guru, says his analysis of US Department of Education data shows that, in fact, only 1.2% of borrowers paid during the prohibition period.
However, he admits it’s unclear whether that number represents borrowers who regularly keep up with their monthly payments, or borrowers who made at least one payment during the freeze.
Borrowers who paid during the freeze are taking advantage of 0% interest to clear their debt and potentially reduce the interest they pay later. But that strategy has its downside.
“I wouldn’t recommend doing that in some cases,” says Kantrowitz. “If you’re working toward debt forgiveness, you don’t want to make optional payments because that reduces the amount that you’ll get in the end.”
He added that borrowers should also be prioritizing higher-interest debt at this time.like a credit card), bulk up their emergency fund, and maximize their 401(k) contributions.
Lauryn Williams, founder of financial planning firm Worth Win in Dallas, Texas, says that if you’re on an income-based repayment plan and you owe more than you earn, paying off the loans. your students during a freeze is equivalent to “flushing money down the toilet”.
The federal government offers four income-based repayment plans, which can see your remaining debt forgiven after making qualifying payments over 10 to 25 years.
Use pause to organize your priorities
Williams believes most borrowers could have focused on other important goals, such as save for an upfront about a home or increase their overall financial stability.
Student success educator Lamesha Brown, based in St. Cloud, Minnesota, said she and her husband were able to buy a home for her sister-in-law in Alabama. They have since converted the house into a residence for those using the Season 8 voucher, opened a Roth IRA Account and was able to buy an apartment.
Brown graduated with a doctorate in undergraduate student affairs administration from the University of Georgia in 2019 and has nearly $32,000 in student debt from her master’s and doctoral degrees.
She said she grew up with little financial literacy. Therefore, it is important for her to focus on other financial goals, especially as a woman of color from a low-income, single-mother family.
“I prioritize these goals, because I have to, and it’s important to my family. It matters to those who come after me. “
Brown added that while she can afford to pay off her student loans at the moment, she chooses not to do so.
“As I entered adulthood, I tried to improve my financial literacy to identify ways that I could create some wealth for my generation.”
The end of the pause can be painful
As Kantrowitz and Williams both expected, the Biden administration extended the freeze again when it announced its student debt forgiveness plan.
The payment pause was last extended until December 31. But even with this extension, some borrowers may still be unprepared to continue paying.
“I think there’s going to be real trauma related to… the loan, in terms of how they’ve been treated,” Williams said.
With just $10,000 in forgiveness (and $20,000 for Pell Grant recipients) on the table, the relief may not completely cut it for some people — especially those who recently found out. surname ineligible for forgiveness total.
In May, the Federal Reserve acknowledged that some borrowers may not be prepared for continued payments, citing rising debt and interest rates in the second half of 2021.
And the New York Fed recently reported that total American household debt skyrocketed in the second quarter of 2022, with credit card balances increasing by the most in more than 20 years.
Lack of education about loans
Williams says many younger borrowers may not understand how student loans will affect them in the long run.
“Imagine you’re 17 years old… you’re just signing the dotted line, because you finished high school. And the next step, as America tells us, is to go to college.”
She added that there is a lack of education about how the different types of financial aid work.
“I would say the most important thing is not to forgo your student loans, to have a plan that works for you,” advises Williams, explaining that students need to consider repayment plans. vary based on income.
Coleman explains that many students may not understand what compounding is or even that a college education isn’t necessarily the best path for everyone.
“When I [was in college], the information they give you is this huge bundle of information, and they’ll say, ‘Here, read this.’ And that’s essentially a contract.”
However, the student loan pause gave Coleman the opportunity to invest in crypto, get more technical education, and start building a mindfulness program for people of different color. neurologically.
Coleman also testified before the Department of Education earlier this year about her negative experience with University of PhoenixShe deeply regretted her decision to attend.
“I think the pause really allows me to step back and see the big picture, and if there is a collective way to be able to handle this situation,” she added. “We can start to move the needle in the way that some of these programs and organizations are being managed and handled.”
What to read next?
This article is for information only and should not be construed as advice. It is provided without warranty of any kind.
