A year without payments with student loans

As a result, about 20 million borrowers currently have their loans in tolerance, according to Mark Kantrowitz, author of “How to Appeal for More College Financial Aid.”

For Kim Stolow, a 41-year-old clinical therapist living in New Jersey, the break came as she struggled to manage job cuts and more childcare commitments.

“Mentally, it relieved the pressure,” he said. “Just one less thing to think about.”

As of December 2019, the average student debt debtor was 34 years old, according to the Federal Reserve Bank of New York. Last year, the average disbursement of federal loan debt for graduate and undergraduate students was $ 11,077, according to the Department of Education.

Total outstanding student debt stood at $ 1.56 trillion in the fourth quarter of 2020, up $ 9 billion from the previous quarter.

For some young Americans, rising higher education costs have increased their debt burden and altered their financial lives. The payment of the student loan and the freezing of interest has provided them with the opportunity to fulfill their duties, pay the debt and take on other responsibilities. Some have used the money to accumulate their savings.

There are indications of where this extra cash has gone and where it has not. An increase in credit scores suggests that more young people are paying off other debts.

Payment of bills

Krystal McCain, 29, found that her two jobs — working as an activity coordinator at a university and working as a waitress next door — were affected by the pandemic. In 2020, he realized he was paying more for his student loan than he was paying for renting his apartment.

With her college job within reach and reduced waitress hours, Ms. McCain said that if it hadn’t been for the suspension of loan payments, she would not have been able to take on the basic responsibilities.

“The beginning of the closure was very hard,” he said. “If all this hadn’t stopped, I don’t know what I would have done. I would have been evicted. I don’t know how I could have paid the bills. ”

McCain said the break in loans allowed him to pay more than $ 1,000 in credit card debt. But in August 2020 she celebrated what for her was an even more important milestone: opening her first savings account.

“I feel extremely embarrassed and incredibly proud,” she said. “I work in higher education and I have a master’s degree, but I was just getting it.”

New York Fed researchers said there is a possible link between more people paying off high-interest debt and the student loan pause. Credit reporting company Experian said average credit card debt for millennials fell 11%.

Get savings

When Jarrod Grim, 35, made his last student loan payment on March 17, 2020, he immediately made a plan: As long as the break was in effect, he would divert the amount of his student loan payment, $ 525, on a separate savings account.

Now, a year later, he has followed the plan.

“In the last 11 months, I’ve added about $ 5,800 to my savings account,” he said. “By the end of September, I estimate I’ll save $ 10,000.”

Initially, Mr. Grim took the step to increase his emergency savings, preparing in case he lost his job.

Grim has $ 80,000 in student loan debt, all federal loans and all accrued from his graduate degree in urban planning at Rutgers University. It consolidated 11 different student loans and expects to repay one with the highest interest rate.

Joy Liu, financial coach at Financial Gym, a financial services company, encourages clients to adopt Mr. Grim’s strategy: continue to allocate money to student loans to your budget, even if it’s not earmarked for time loans.

“What we’re really trying to do is never want them to go out of their way to pay them,” he said. He said the money can be used to save, bills or investments or to pay off student loans after the break.

An uncertain future

Not all borrowers have benefited from the breakdown of loan payments. While 89% of student loan borrowers have been helped by the freezing of payments, the rest of those left out are borrowers with private loans.

Chandler Perry, 27, a graduate student at the Massachusetts Institute of Technology, said uncertainty has been a major factor in his decision-making over the past year, especially when he saw how peers benefit. of the pause. Even with a major scholarship, Ms. Perry has amassed more than $ 120,000 in private student loans, which continue to accrue interest.

Ms Perry, who identifies herself as black, described the student debt crisis as “another obstacle for minorities”.

While 20% of residents of black-majority neighborhoods have outstanding student loans, which is higher than in neighborhoods with a majority of white or Hispanic residents, the New York Fed found that the increase in cash flow from pause in loan payments was smaller among resident borrowers Black communities.

He is now considering taking out federal loans for next year, in part to help pay off his existing loans.

“It’s counterintuitive,” Ms. Perry said. “I’m paying off my loans with the money from my loan.” He hopes Congress will have more transparency regarding the duration of the freeze and what can be expected in terms of forgiveness.

Wait and see

Ms. Liu, the financial coach, has had to convince some people that it is okay not to pay the loans at this time. For those who can manage it, the break offers a rare opportunity to be strategic and catch up with other financial goals.

“There’s something about the American student loan system that’s really triggering it,” he said. “So people are very resentful of their student loans and want to turn their backs on them. Maybe this is helping some get out of the mental block that they couldn’t have children or get married until the student loans were paid off. “

Emergencies often mean people have no choice but to manage urgent expenses before preparing for bigger money milestones, said Kantrowitz, the author of the financial aid book.

“People don’t have to feel guilty,” he said. “If you need that money to pay for groceries, to manage medical expenses, or to pay other debts, do it. You often have no choice but to do so.”

—Allison Prang contributed to this article.

Write to Amber Burton to [email protected] and Julia Carpenter to [email protected]