The Covid-19 Pandemic has taught us many important student loan lessons. Some of these lessons were harsh. Others were a pleasant surprise.
The borrowers and future students who apply these lessons to their planning will be better situated to manage their debt — no matter what the future holds.
Federal Loans Are Much Better Than Private Loans
For many years this site has advocated maxing out federal options before considering a private loan. Even though federal loans charge an origination fee and occasionally have higher interest rates, they are preferable.
The primary benefit to federal student loans is the borrower protections available. The best-known protection is likely the forgiveness programs capable of wiping away entire balances. Another critical protection is the option to make payments based upon what you can afford rather than what you owe. Income-driven repayment plans help ensure that borrowers never have to choose between food on the table and student loan bills. In some cases, this means $0 monthly payments for borrowers.
Sometimes people don’t graduate. Other times people graduate, but they don’t find a job. Sometimes people find a job, but they lose it due to a global pandemic. Covid-19 is a reminder that unexpected events happen. When the unexpected happens, federal loans provide far more flexibility than private loans.
Students about to start school or in school should take steps to minimize private loan borrowing. Borrowers in repayment may want to consider paying off their private loans first, even if the interest rate is higher on the federal debt.
Can I Convert Private Loans into a Federal Loan? Options are limited for borrowers in repayment, but it is possible to gradually convert private debt into federal debt. Things are a bit easier for borrowers still in school.
The Federal Government And The President Can Make Dramatic Changes To Federal Loans
President Trump set interest rates on federally-held student loans to 0% at the start of the pandemic. Congress passed legislation extending the break. President Biden continued the practice until at least October of 2021.
In the history of federal student loans, there wasn’t any precedent for this move. However, the maneuver received bipartisan support and provided an essential lifeline to borrowers.
The lesson from this change is that the President and Congress can have a considerable influence on federal student loans. This potentially includes the ability to cancel out large amounts of debt for all federal borrowers. While this variable complicates repayment planning, it is an important consideration moving forward. With interest rates on federal loans still at 0%, many borrowers are choosing to focus on debts other than their federal loans.
Beyond the possibility of cancelation, the big variable is that terms may change. Private loans have fixed contracts, and lenders rarely deviate from the rules of the loan. Federal loan rules may change in favor of the borrowers. A new repayment plan may come into existence, or tax incentives might be created. Nothing is inevitable, but borrowers should closely follow any developments as they happen.
Colleges Are Ruthless
When the pandemic first started, many schools quickly ended in-person learning. Buildings were closed, and the educational experience looked a lot different. What students expected when they paid for school and what they got looked very different.
Despite the massive changes and considerable endowments available, the vast majority of schools offered no refunds on tuition. Many families brought lawsuits, but the odds of success on those lawsuits look slim.
The lesson for students: when it comes to financial matters, don’t count on your school for an act of goodwill.
Expecting The Unexpected
Like so many aspects of life, Covid-19 changed higher education and student loans.
The students and borrowers who maintained flexibility were best positioned to handle the major changes.
Going forward, there are three things borrowers can do to maintain flexibility:
- Knock out student debt when possible.
- Stick with federal student loans.
- Have an emergency fund in place.