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On August 6, the government extended the grace period for federal student loans until January 31, 2022. Those with outstanding balances will continue to see the suspension of loan payments, the 0% interest rate applied to these loans, and the government will suspend collection of overdue loans.
It was clear to officials that this was the “final extension” of the student loan pause, which began in the spring of 2020 amid COVID-19.
For those still grappling with the financial fallout from the pandemic, the news came as a relief. However, now is the time to prepare for when the clock starts ticking again. If you have a traditional repayment plan, the abstinence period put your schedule on hold, but the amount of time you did not pay will be added to the previous end date.
If you’ve opted for an Income Based Repayment (IDR) plan, suspension of COVID won’t slow down your progress. In fact, the government is counting the suspended payments against your forgiveness. However, “IDR plans recalculate the repayment amount each year to reflect changes in your income and household size.”
The flexibility provided to borrowers on student loans underlines the idea that economist Beth Akers articulated in her book Make College Pay: An Economist Explains How to Bet Reasonably on Higher Education. The topic of borrowing to fund higher education can also be a smart form of arbitration. (Arbitration describes a situation where investors can buy an asset in one place and then sell it almost simultaneously elsewhere, so that they can fix locations in the markets, making a decent profit at a relatively low level of risk.)
When I interviewed Akers for my podcast, she noted that college education can add almost $ 1 million in income over a career, which is 15% higher returns according to research from the Federal Reserve Bank of New York. what those who do not have a degree earn. Given that the federal student loan interest rate is currently 3.734%, Akers argues that those who end their programs with debt are still in better shape than they would be without a degree. Educational arbitration is the difference between the cost of a student loan and the return on investment in tuition. With so much difference between the two, who wouldn’t want to borrow at low amounts and invest for much higher returns?
Akers warns that there are risks in this process. There are systemic risks, that is, those that you cannot control, for example, if you are unlucky and fall into a recession. But there are also idiosyncratic risks (those you can control) that higher education abounds. Arbitration doesn’t work if you don’t finish your studies – and unlike other endeavors, there is no partial credit for a two-year, four-year program. Refunds are also reduced if graduation takes too long or if students choose the wrong college or major.
To minimize risk, families should talk frankly about what they can afford and do research. Akers recommends the College Navigator and College Scorecard, government-provided search tools that allow families to track expenses, graduation rates, employment rates, and earnings.
Young people today have access to data through the college scorecard. Use this data to analyze the costs and benefits with your child so that both of you can understand what the costs are or not. Hopefully they will remember the session when they decide to sign up for basket weaving or bookkeeping.
Jill Schlesinger, CFP, CBS News Business Analyst. A former options trader and CIO of an investment consulting company, she welcomes comments and questions at askjill@jillonmoney.com. Visit her website at www.jillonmoney.com.
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