As much of the country goes into an extreme lockdown during the Coronavirus outbreak, the economy comes to a screeching halt, and social distancing is becoming not just a suggestion but a requirement, and it’s not abnormal to begin to panic.
The whole world might seem like it’s coming to an end yet you still have bills, which include but are certainly not limited to, your student loans.
If we can offer you any advice right now during these trying times where there is not necessarily an end in sight, it’s to pause your panic to start to make a plan that fits your life and needs.
Of course, it’s easier said than done, but if there’s any peace of mind in knowing that around 44 million Americans are also in this same position of carrying about $1.7 trillion in student loan debt…and many of which are facing the same dilemma of reconfiguring their plans to make sure they don’t default…we hope that you can find it.
We’re all in this together, and panic only leads to more stress and weakened immune systems in a time that we desperately need them to be working for us.
So if you’re feeling yourself in a similar panic, here’s how you can make a plan to avoid defaulting on your loans during the Coronavirus outbreak.
How to adjust your federal student loan repayment plans during the Coronavirus outbreak
One of the worst ripple effects the Coronavirus has caused is a series of layoffs due to the inability to open storefronts due to social distancing, as well as the tightening of budgets because of the economy drop and several other factors causing businesses to have to make such hard decisions.
It’s estimated that 3 million Americans will be laid off by the time summer rolls around. To put this into perspective, during the Great Recession from December 2007 to early 2010 around 8.8 million jobs were lost, over the course of 18 months.
The hard to face fact is, that if this happened to you, you’re not the first or that last to go through this type of hardship and there are ways to find a light in these bad situations.
But as you’re sorting through these difficult decisions you’re being forced to make, you might want to know what on earth you should do about your student loan payment that doesn’t stop being due despite being out of a job, and despite the world being in a complete crisis.
Switch to income-driven repayment
If you or your significant other still remain in a job, you can adjust for your payments to be switched to income-driven so you don’t totally halt your progress on paying off your loans.
These income-driven repayment plans are available if you have federal student loans and they are calculated based on a specific formula that adjusts your monthly payments so that they can be easier to manage.
It’s not difficult to switch into this income-driven plan especially as your circumstances might have just changed drastically.
During the Coronavirus outbreak, this might be a better option than complete deferment or forbearance which we will discuss later in this article. The reason being, some of the income-driven programs are renewable year after year and allow borrowers to pay as little as $0 if the net income for their household is less than 150% of the poverty limit for their family size.
Switching into an income-driven repayment plan for a long enough period of time could make you eligible to receive loan forgiveness depending on what your circumstances are down the line.
If you’re interested in applying, you can receive more information here and apply directly online.
If you’re already on an income-driven repayment plan, apply to get your payments recalculated
If you have already been utilizing an income-driven repayment plan to pay back your student loans you can request a recalculation of your monthly payments at any time if your circumstances have changed.
For a situation like this, in which you are facing a lost job you can resubmit an application right now to get a lower payment that is based on your current income situation.
If this is an option for you, you should opt to recalculate your payments rather than apply for deferment or forbearance. Staying in the program still makes you eligible for eventual student loan forgiveness if you were on track to receive it. Not to mention it allows you to avoid interest capitalization when leaving the program.
If you’re unfamiliar with interest capitalization, it’s when your unpaid interest is added to the principal balance of the loan. This does happen when you go into periods of deferment or forbearance so taking advantage of the income-driven repayment plan is highly suggested by our team at College Life Today.
Deferment and forbearance as a last resort
You can completely pause your payments on your student loans and remain in good standing during a time of economic hardship.
If you have federal student loans you are in much better shape to do this than if you carry private student loans.
For federal student loans, you have a few years of economic hardship versus a year or less for private loans.
During a time of deferment and forbearance, interest still accrues on the loan. However, during these special circumstances, President Trump has declared an interest freeze for federal student loans, which means they will not accrue interest in this period of deferment and forbearance. This will help down the line but has little effect immediately.
This interest freeze is only available to those with federal student loans. However, private student loans and Perkins loans do not qualify for this.
Ultimately, deferment and forbearance are last resorts and you should explore other options before settling for this one. The reason for that being it can drastically change your student loan repayment plans and put you way off schedule. If the interest freeze did not get implemented you would also be accruing capitalized interest as explained above.
How to adjust your private student loan repayment plans during the Coronavirus outbreak
There are certainly fewer options for those with private student loans vs federal student loans during economic hardships.
Private loans do not offer an income-driven repayment program and the deferment and forbearance options are much more rigid as far as timeframe and terms.
Some private student loan lenders can offer a temporary modification to reduce monthly payments in financial and economic hardship.
This choice is entirely up to the lender and there’s not much regulation on them as far as which ones are more likely to and which ones are not.
Be cautious of these, it is not uncommon for a lender to offer a temporary payment adjustment but to later on down the line increase the payment to make up for the loss.
Read the terms and fine print if you do take one of these options. The more aware you are of what you are taking on, the less likely you are to be surprised later on down the line.
Refinance your student loans
If you have been waiting to refinance your student loans to lower your monthly payments and make your student loan bill more manageable, now could be the best time.
The interest rate was just officially set to nearly 0% as of March 15 which includes credit cards, auto loans, and even your student loans.
If the only loans you hold are private student loans then this could be a no brainer for you. Even if you were considering forbearance and deferment, refinancing with a new company that offers more flexible terms during forbearance and deferment periods could be a power move also.
With extremely low rates, this option could help you lower your payments and also set you up for future success when finances do turn around.
If you do hold federal loans and you are not confident about your income or your health in the next few months and if you’re working towards student loan forgiveness, do not refinance your student loans.
Refinancing your federal student loans voids all the options that they make available to you and if any of the above are a concern then you could put yourself in a tight situation and end up defaulting on your refinanced loans which could be detrimental to your overall financial health.
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Watch the news carefully
If you’re not confident about your options just yet, hold out on making your decision until President Trump makes a final decision on student loan payment suspension. Chances are things could change as the COVID-19 crisis ramps up in the United States so making any rash decisions could be a little too premature.
Until then, monthly payments for student loans will continue to be due as well as any collections in relation to defaulted student loans which could affect you. Especially during this tax season as tax refund interceptions are a common way for the government to intervene and collect your tax money without your approval.
Your decision should be one that’s right for you and should be carefully considered and tailored to your needs. Don’t forget to take care of yourself during this time and make sure that your mental health is in check so that you can make the most sound decision for your financial future.