The $1.9 trillion relief package signed into law by President Joe Biden provides several provisions that benefit both university student loan borrowers and non-borrowers and should pave the way for broad-based student loan forgiveness within the future.
The recent $1 billion cancellation and even the potential $10,000 cancellation plan, reinforces the “targeted” approach of the Biden administration. Research from JP Morgan Chase Institute “shows that targeting student loan forgiveness by income would be less expensive in channeling relief to the hardest-hit families whose circumstances make it difficult to repay and who, in some cases, face a long-term debt trap from their education,” JPMorgan Chase Institute co-president Fiona Greig said.
Other data support this view. Over 60 percent of education debt is owed by households making quite $74,000 with about 36 percent of all student debt owed by individuals within the top 20 percent of income distribution. Additionally, quite half student debt is owed by households pursuing a graduate degree. Finally, a National Center for Education Statistics study found that “around 64% of individuals who default their student loans owe but $10,000” noting that “a good portion of them never earned a university credential and are available from underserved communities.
However, even the $10,000 cancellation of student loans stimulus packages wasn’t included within the $1.9 trillion stimulus bill. it’s uncertain whether Biden will use executive authority to write-off the debt or whether Democrats will attempt to include a provision in upcoming legislation.
As mentioned before, even if the government delivers the benefits, many borrowers will not be able to access them. Private loan borrowers especially need to look for alternative ways to reduce debt obligation during the pandemic. This section will look into some options accessible to such debtors. If you cannot decide which one is the most suitable, you can contact our debt specialists.
Student Loan Refinancing
Student loan refinancing is one of the best options available to private borrowers. Refinancing happens when a borrower gets a new loan and uses its funds to pay off all existing debt. As a result, the debtor deals with a single loan. One might question what changes after refinancing. The rationale of refinancing is that the new loan should have better terms, like reduced interest rate and monthly payments. In this way, financially struggling debtors can get rid of the high monthly debt payments quickly.
Certain qualifications make refinancing possible. In more detail, three elements- credit score, income, and co-signer matters. Usually, borrowers with a higher than 600 credit score will be able to get loans with better terms. The income level of the borrower should be stable. Otherwise, the creditors would not risk allocating the funds to potentially unemployed people.
Lastly, a co-signer is required in most cases. The co-signer is a third-party individual responsible for the repayment if the borrower fails. Sure, some companies distribute loans without requiring a co-signer. However, as the creditors take more risks, they would probably ask for a higher interest rate.
Benefits of Refinancing
The suitability of refinancing and its benefits depend on the borrower’s qualification. For example, refinancing is not the best option for federal loan debtors. The reason is that there exist many federal programs benefiting them, like top forgiveness programs. If the new loan brings more favorable terms for private borrowers, applying for refinancing is a great option. Besides, the application process is mostly free of charge. Hence, borrowers do not lose much by applying.
In general, the advantages of student loan refinancing can be:
Decreased monthly payments
Move to fixed/variable interest
Consider Before Applying
Previously, we mentioned that the application usually involves no fees. Hence, it is easy and cost-effective to refinance in a few steps on online platforms.
However, applying multiple times and getting rejections can negatively impact credit performance. Before application, the borrowers should at least ensure that they have a high chance of acceptance. Best refinancing companies provide pre-qualification services on their websites. Borrowers can use this function to submit the information and check which interest rate they qualify if they are eligible. Pre-qualification usually does not hurt the credit score while introducing refinancing benefits/drawbacks.
Another option for private borrowers can be debt settlement. There exist third-party debt settlement companies that can guide the borrowers. In general, debt settlement is the process of convincing the lender to agree to a lower lump-sum amount than the total debt owed.
Sure, the lenders can only agree to lower payment if they know that otherwise, the borrower will not pay at all. Therefore, debt settlement works only if the debtor has no other chance and already failed many due payments.
Debt settlement companies help develop a plan so that instead of repaying the debt monthly, the borrower directs funds to a saving account. After a time, some money is collected in this account, which allows the settlement company to convince the lender.
However, borrowers should also keep in mind that the debt settlement can hurt the credit performance. The process is time-consuming and can be expensive, depending on the fees involved.
Contact the Lender
In some cases, the best solution for private loan borrowers is contacting the lenders. If the borrower faces temporary financial difficulty or suddenly loses the job, it is better to immediately inform the lender. In this case, the creditors can advise the further steps. They can agree to grant a forbearance/deferment period or decrease the interest rates for a short period.
Sure, the lenders have no obligation to provide favors. However, if they believe that the borrower has no other option and can default, they can agree to little changes.
Other Options for Federal Borrowers
Only because the government provides help does not mean that the debtors should wait for the federal aid and content themselves with limited assistance, like an eight-month suspension period. You have to stand up and find your way to get rid of the debt. The stimuli package for student loans or the loan forbearance period is only temporary. Instead, you need to look for better options and start working for them.
Different from private debtors, federal borrowers can access more useful programs. Forgiveness, discharge opportunities, repayment plans, consolidation, etc., exist to assist federal loan borrowers. Hence, you need to check these options and find the most suitable one. As a result of applying to the right program, you can get a 100% reduction in debt, rather than waiting for the government’s favor.
This guide discussed the main stimulus packages since March 2020 and other benefits for student loans, such as debt collection suspension. Although the government attempts to ease the difficulties borrowers face during the COVID-19 pandemic, debtors should not content themselves with federal assistance.
There are not many benefits in the stimulus package for student loans, except the forbearance period with 0% interest. When the debt collection is resumed, many borrowers will continue struggling with the debt payments. Hence, during the current 8-month suspension period, it is a better idea to look for other solutions.
We presented several alternatives both for private and federal borrowers. If you want to get more information, you can immediately check our blogs or contact the Student Loans Resolved experts.