Federal student loan payments and interest set to resume
It has been almost two years since most people with federal student loans had to make a payment. In March 2020, as part of the response to the pandemic, the federal government suspended these payments and temporarily set the interest rate on student loans at zero.
But at the end of January, interest and payments are expected to resume for more than 40 million people.
Krista Pechacek doesn’t feel ready.
“It’s another, like, $ 300 to $ 500 a month on my paychecks that I can’t spare,” she said.
Not having to make these payments over the past 21 months has allowed Pechacek, 24, to leave his parents’ house, pay some medical bills and stop using his credit card so much.
“I have become much, much more independent without having to pay for this every month,” she said.
Even though she also has a new job as an administrative assistant at a K-12 school in Seattle – where she earns more than before as a pastry chef – she still has a lot of medical bills she’s trying to pay.
“So I don’t feel very good about paying off student loans. “
Where the money goes
About 75% of people with federal student loans say having to make payments again will negatively impact them financially, according to a recent survey by Bankrate and BestColleges.
“The federal student loan forbearance program has been extremely helpful for borrowers,” said Sarah Foster, analyst at Bankrate. “Many of them took the opportunity to continue paying for essential things in their budget.”
About 40% of borrowers said they used money they would otherwise have invested in student loans to pay household bills and other daily expenses. About 30% used it to pay off credit cards, medical bills, and other debts, and about 25% used it for rent or their mortgage.
“The break has been massive,” said Christopher Gaunya, who was fired from his acupuncturist job in a hospital a few months after the start of the pandemic. “Because I was able to kind of keep my head above water for the duration of the pandemic. “
At 59, Gaunya still owes around $ 143,000 in student loans, in part because the interest rate on her loans is over 8%. So even though he’s been paying hundreds of dollars a month for years, his balance has gone up.
“And in the last couple of years all of a sudden that payment was gone, and I was able to do things like maintain my car and pay my rent and not see my savings account drain, and more. be able to save some money for my retirement, ”he said. “It was literally like the elephant had descended from my chest.”
Perhaps even more significant than the payment hiatus, according to Betsy Mayotte, president and founder, the fact that personal loans did not bear interest at 4%, 6% or 8%. Institute of Student Loan Counselors.
This meant their balances didn’t increase until they paid, and it gave people who could afford to make payments a chance to really lower their loan balances.
Take advantage of the 0% interest rate
“What I was hearing from borrowers was, ‘Look… the interest rate doesn’t make me feel like I’m on an equal footing. And having at least 0% interest made me feel like I was on an equal footing, ”Mayotte said. “I’ve seen borrowers who took advantage of the 0% interest rate and spent every penny they could on their student loans to reduce the principal or pay them off completely. “
She also heard from many borrowers who used this time to build up emergency savings, some for the first time.
“What they did with these waivers was necessary,” Mayotte said. “And that was way beyond any type of student loan relief I’ve seen in my career.”
Christopher Gaunya is still hoping for some forgiveness on his student loan, although there is no indication that this will happen.
He is therefore also preparing to start repaying his loans again in about a month. And while he’s not looking forward to it, he’s happy that it’s happening now rather than a few months ago.
“I feel like I have a solid situation to deal with this,” he said.
After a year and a half of unemployment and underemployment, this month he finally found a new full-time job as an acupuncturist at a Massachusetts veterans medical center, earning more money than he did. previously.
“It’s the perfect timing,” Gaunya said with a laugh. “Just in time to pay off my student loan. “