A case study in today’s America

Below is extracted from an advice column. The person asking advice is a thirty year old who had been making student loan payments regularly, payments not much higher than her car payment which she still makes. But she stopped the student loan payments because during the pandemic interest has been stopped. She has not lost her job or had pay reduced.

She earns $63,000 annually.

Advice:

  • Continue to not make payments while the loan is in forbearance and the interest rate is 0% for federal student loans.
  • Wait to see if this administration moves forward with waiving student loan debt of up to $10K (higher amounts of forgiveness are being discussed as well, so it’s very much a wait-and-see moment for student loans)
  • I very rarely advise people to not pay off debt, but given the forbearance program as well as the looming potential for loan forgiveness I think it’s wise not to pay down federal student loans right now (provided you’re certain you qualify for the federal student loan forbearance program. Read more about pandemic-specific financial programs in my series.
  • Once the COVID forbearance program ends on September 30, 2021 (although keep an eye on this date as it continues to be pushed back), resume paying the monthly minimum required payment.

If I was in this position I think I would do the same thing, not make payments. Of course, it would not be the moral thing to do because I incurred the debt and I am able to make payments.

But this is what you get when policies are based on generalizations, on ignoring obligations on telling people they are victims of something or someone and therefore deserve to have others bail them out.

6 comments

  1. Let me get this straight, you take out thousands of dollars in student loans and then you expect to never have to pay the loans back? Why doesn’t the government just let people who need help include student loan debt in bankruptcy, then only the truly needy would have their debt forgiven. For those who can make payments on their student loans, I would think it would be better to make at least the minimum payment now as it would all go towards the principle. Because, who knows if the Congress will ever pass any student loan forgiveness legislation.

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  2. Loan forbearance and or loan forgiveness is pandering to a constituency and sends an absurd message to those who incurred the debt, that they won’t have to take responsibility for their own lives. It would be the same thing as bailing our cities who have constantly mismanaged their finances. I think I see a trend!

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    1. Loan forbearance/forgiveness isn’t about sending messages. It’s about helping people who are in trouble. Is that so awful?

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  3. I tend to agree that I would stop paying my student loan too if I had a lack of income due to covid and the forbearance was an option. But I would seek professional advice, not an advice columnist.

    You really need to find out the exact terms of your forbearance. In some mortgage forbearances, lump sums are due at the end or extra payments are required once you resume paying which you still might not to be able to pay. In this case, the 0% interest will not add to the debt just prolong the debt, which is better than defaulting.

    My real concern is the student lender servicers. During good financial times, I have read horror stories of how other student loan forgiveness plans were not honored due to complex paper work and poor record keeping on both the lender and the student. (Think teachers teaching in inner city schools for 5 years that get money off their loans). You never know, there might be a clause somewhere in your loan papers that could nullify the forbearance sometime down the road making things worse (such as a late payment). The lenders know that the people behind on their loans can’t afford lawyers.

    Government ordered shutdowns may have made these forbearance necessary but what were these students going to do if under normal economic times and they got laid off? What was their plan? The same with people with mortgages? Do you sign a 30 yr mortgage not knowing that over 30 years that you may get sick, get laid off, or can’t work because of a strike? My plan was to work as many jobs as I could even if it was flipping burgers. At the 3 month point, I would put the house on the market hoping before it sold that I was back at my old job. But then again I had an 3 month emergency fund. Who would have thought that you needed a 12 month emergency fun and counting in NJ? I am sure when this was first offered, they were only thinking in terms of 3-6 months. What is the affect of 12-18 months of forbearance?

    One final note, according to Experian web site, forbearance and deferments will likely have negative consequences for your credit scores—unless you are requesting forbearance due to the coronavirus crisis per the CARES Act. But I have no faith that lenders will due that correctly. I guess unless you have some documentation stating that the forbearance request is due to covid, you are screwed.

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