As many of you are experiencing during this time, COVID-19 is hitting many families financially in a negative way. Some families are out of work and are having trouble keeping food on the table. With bills stacking higher and higher, there is a monster that in staring 43,000,000 Americans in the face... student loan debt.
Americans owe a total of 1.59 trillion dollars in student loan debt. During this time of hardship, it is very difficult for people to make consistent payments. The United States of American Education Department (ED) has looked heavily into this matter and has come up with a solution that will help millions of Americans during this time.
The ED, on Wednesday, has stated that it intends to, “provide relief to student loan borrowers during the COVID-19 national emergency, federal student loan borrowers are automatically being placed in an administrative forbearance." Put simply, student loan payments are temporarily suspended. As stated by the ED, “temporarily stop making monthly student loan payment.” The ED has postponed all required student loan payments for six months. This six month period is from March 13, 2020 until September 30, 2020. During this six month period, for certain loan types, the interest rate is reduced to 0.00%
So, now that you know the numbers and the new ED requirements, what does this mean? What is the COVID-19 Student Loan Trap?
The COVID-19 Student Loan Trap is the belief that, during this time, if you are still able to pay your payments, that you should not continue paying and just save up or find other, non-essential, uses for your money. Now is the PRIME opportunity to get ahead on your student loans. But, are you ready? Let's find out.
You are ready to begin getting ahead if:
You are caught up on all other payments (not behind)
You have an emergency fund of $1,000 in place
Your student loans are your smallest debt
You can support your four pillars
If the above statements are true, you are ready to get ahead of your student loans. As previously mentioned, since the interest rate on student loans have been reduced to 0.00%, and payments are not required until September 1, 2020, many people will stop paying their loans. This is a BAD mentality to have. You should be taking advantage of this golden opportunity! Here is why. With a 0.00% interest rate, all payments are going straight to your loan's principle balance. So, what does this mean?
Over time, your student loans are accruing interest at an average rate of 5.8%. This means that, annually, for every $1,000 of principle, you're having to pay an additional $50.80 of just interest. However, if you can reduce that $1,000, the interest, even though it will still be *5.8%*, you will be paying less in interest in the long run. Also, if you are not paying your student loans for six months, that is just six months longer that you will be paying your loans and the longer that you will be in debt and unable to make smarter financial decisions.
We highly encourage you to continue continue paying during this time in order to reduce the amount of money that you will owe over time and so that you will become debt free quicker and begin making smart money moves.
An important thing to note is that, during this time, auto-pay options have been disabled for many people. Please with those handling your loans and, if you wish, talk to them about continuing auto-pay!
Please take this time to make smart money moves and see the opportunities others may not see! If you do this, you will be well on your way to making your financial dreams come true!