As Covid-19 continues to impact the US economy, several of my best tips for March 2021 involve managing debt in uncertain times.
The government created several temporary programs to help borrowers in need. These same programs also provide an opportunity for those in more secure positions.
Additionally, we are at the start of tax season. There are a couple of moves borrowers can make right now to make April a little less painful.
Tip #1: Don’t Make Federal Student Loan Payments Right Now
President Biden issued an executive order extending the interest rate freeze until October for all federally-held student loans.
Some borrowers and finance experts suggest that the 0% interest is an opportunity to knock out student loan debt. The idea is that borrowers who can afford to make payments continue to make payments. At the end of the interest freeze, these borrowers will have significantly reduced balances.
While I see the merits of this approach, I think there is a better way of doing it. Rather than giving the money to the government, borrowers should use the opportunity to build up their emergency fund. Ideally, all student loan borrowers should have an emergency fund. The interest freeze provides a chance to make sure sufficient funds are available. Any planned federal student loan payments belong in this fund.
At the end of the interest freeze, borrowers can make one large payment on their student loans. If things go as planned, the result will be the same as if they continued making monthly payments.
However, there are two significant advantages to delaying the payments until the very end:
- Borrowers can earn interest on their money. This is the rare instance where a high-yield savings account will pay a higher interest rate than what a student loan charges. By being patient, borrowers can earn some money,
- Borrowers get flexibility. This is the big one. If you lose your job or get sick and face substantial medical bills, you will be glad you kept the money.
The one exception to this suggestion would be for the borrowers who don’t think they have the self-control for this strategy. If making regular monthly payments seems easy, but you fear you wouldn’t actually send in the large payment at the end, stick with making regular payments.
Tip #2: Ask for a Refund on Your Previous Federal Payments
This tip is a continuation of the previous one.
If you made unrequired payments during the interest freeze, you might be able to get a refund for that payment.
Getting a refund only to return the money in eight months may seem like a waste of time. For many borrowers, it would be a waste of time.
However, having extra money in reserve, even if only for a short period, could be significant. If you are a couple of bad breaks from dire financial circumstances, getting the refund is worth the effort.
Tip #3: March is Tax Time
March is the heart of tax season.
Student loan borrowers get a small deduction for student loan interest paid. However, the student loan impact on taxes goes far beyond a single deduction.
Borrowers on Income-Driven Repayment Plans like PAYE or IBR need to think about if they want to file jointly or separately.
Those working on student loan forgiveness can utilize my favorite student loan hack to save extra money for retirement, lower their taxes, lower their student loan bills, and get more student debt forgiven.
The Student Loan Planning and Tax Strategy article now includes changes for 2020 tax returns.
Tip for PSLF Borrowers:I think tax season is a great time to do a yearly checkup on PSLF progress.
If you make a habit of certifying your employment each tax season, it will never fall through the cracks.
Tip #4: Making Sense of the News on Student Loan Forgiveness and Cancellation
Many Democrats are getting increasingly vocal about student loan cancellation for all federal student loan borrowers.
President Biden has pledged support for $10,000 worth of forgiveness, but only if it comes through Congress. Many in Congress are calling for $50,000 of forgiveness.
Tip #5: Start Thinking About the Repayment Restart this Fall
We are still about six months away from federal student loan payments resuming.
However, when that day comes, borrowers will have a really hard time calling their servicers and getting help. They estimate that in one month they will get more calls than they normally receive in a year.
Combine that with the fact that servicers laid off staff at the beginning of the pandemic and you have the ingredients for a very difficult situation.
Borrowers that plan ahead and get their questions answered in advance can avoid the mess.
Tip #6: Now is a Great Time to Refinance Private Student Loans
For nearly a year, I’ve been telling borrowers not to refinance their federal loans. The big benefit of refinancing is getting lower interest rates, and no refinance company can beat the 0% offered on federally-held student loans.
The refinance companies have been feeling the pressure. With fewer borrowers looking to refinance their loans, competition has gotten intense. As a result, interest rate offerings have been very aggressive, which means lower rates for borrowers.
I know that many borrowers like to opt for shorter-term loans with lower interest rates, but if I had to refinance my private loans right now, I’d select a 20-year fixed-rate loan.
Here again, I tend to be conservative and prefer flexibility. A longer loan means a slightly higher interest rate, but much lower minimum monthly payments. However, borrowers can always pay more than the minimum required. The benefit of a low minimum is the protection it offers in lean months.
At present, the following lenders offer the lowest rates on 20-year fixed-rate loans:
|Rank||Lender||Lowest Rate||Sherpa Review|
|2||3.61%||Splash Financial Review|
|3||3.93%||Citizen's Bank Review|