Burdened by nearly $90,000 in federal and private student debt, Alphi Coleman says the loan freeze has given her time to unplug and invest in herself.
“I can always make money; I won’t always get more time,” she says. “I am able to create experiences and create space and time for the people I love.”
A Federal Reserve report in May showed that nearly 60% of student borrowers made zero payments on their federal loans between August 2020 and December 2021. Some experts say the real number is even higher.
Coleman, an army veteran and founder of the HR consulting firm Aurelian Black, was able to use government support for veterinarians to cover some of the costs of attending the University of Phoenix from 2011 to 2018.
Still, she says, the education wasn’t worth the financial burden for her.
“There are so many jobs that will allow me to maintain the salary and career path that would allow me to repay these loans in a reasonable amount of time.”
Like many grads, Coleman says she is not prepared to resume payments when the forbearance ends – currently set for Aug. 31. With inflation burning through budgets and with no more federal aid in sight, time is running out to find new solutions.
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Should borrowers make payments?
The pause on student loan payments and interest has been extended several times since it was first established under the Trump administration in March 2020. For cash-strapped graduates, it has been a godsend.
Mark Kantrowitz, student loan expert and author and editor of PrivateStudentLoans.guru, says his analysis of US Department of Education data shows that, in reality, only 1.2% of borrowers are making payments during forbearance.
However, he admits it’s unclear whether that number represents borrowers who regularly keep their monthly payments or borrowers who made at least one payment during the freeze.
Borrowers who made payments during the freeze are taking advantage of the 0% interest rate to reduce their debt and potentially reduce the interest they owe later. But this strategy has its drawbacks.
“I don’t recommend doing this in some circumstances,” says Kantrowitz. “If you’re working towards loan forgiveness, you don’t want to make payments that aren’t necessary because that reduces the amount of forgiveness you’ll get.”
He adds that borrowers should also prioritize higher-interest forms of debt at this time (such as credit card debt), increase their emergency fund, and maximize their 401(k) contributions.
Lauryn Williams, founder of financial planning firm Worth Winning in Dallas, Texas, says that if you’re on an income-based payment plan and you owe more money than you earn, paying off your student loans during the freeze is the equivalent of “gambling.” money down the toilet.”
The federal government offers four income-based payment plans, which can see your remaining debt forgiven after making qualifying payments for 10 to 25 years.
Graduates may have other priorities
Williams believes that most borrowers may be focusing on other important goals, such as down payment on a home or increasing their overall financial stability.
Successful student educator Lamesha Brown, based in St. Cloud, Minnesota, says she and her husband were able to buy their sister-in-law a home in Alabama. They have since converted the house into a residence for Section 8 voucher users, opened a Roth IRA account and purchased a condo.
Brown graduated with a doctorate in student affairs administration from the University of Georgia in 2019 and has nearly $32,000 in student debt from his masters and doctoral degrees.
She says she grew up with little financial literacy. As a result, it was important for her to focus on other financial goals, especially as a woman of color from a low-income, single-parent family.
“I prioritize these goals because I need to, and that’s important to my family. It is important for those who come after me.”
Brown added that she can pay student loan payments at this time, but chooses not to.
“As I navigated my adult life, I worked on increasing my financial literacy to determine ways to create some generational wealth.”
Are Americans prepared to resume payments?
Kantrowitz and Williams believe the Biden administration will extend the freeze again as it is election time.
Williams says half of borrowers are likely not ready to resume payments.
“I think there will be real trauma related to the … loan, about the way they were treated,” she says, adding that some may be betting on future loan forgiveness.
Biden announced in April that his administration was considering reducing student loans but scrapped $50,000 in forgiveness.
More recently, the federal government canceled $3.9 billion in debt for more than 200,000 ITT Technical Institute alumni and $5.8 billion for 560,000 borrowers who attended Corinthian Colleges.
The Federal Reserve acknowledges that some borrowers may not be prepared for resumption of payments, citing rising defaults and interest rates in the second half of 2021.
The lack of education about loans
Williams says many young borrowers may not have realized how student debt would affect them in the long run.
“Imagine being 17…you’re just signing on the dotted line because you finished high school. And the next step, as America tells us, is going to college.”
She adds that there is also a lack of education about how different types of financial aid work.
“I would say the most important thing is not to ignore your student loans, to get a plan,” advises Williams, explaining that students need to look at the various income-based repayment plans.
Coleman explains that many students may not understand compound interest or that higher education is not necessarily the best path for everyone.
“When I [was in college], the information they gave you was a huge package of information, and they said, ‘Here, read this.’ And that is essentially a contract.”
However, the break from the student loan gave Coleman the opportunity to invest in cryptocurrency, get more technical education, and start building a mindfulness program for neurodivergent people of color.
Coleman also testified in front of the Department of Education earlier this year about her negative experience with the University of Phoenix, which made her deeply regret her decision to participate.
“I think the break really allowed me to step back and see the full picture, and if there was a collective way to handle this situation,” she adds.
“We can start to change the way some of these programs and institutions are being governed and administered.”
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.