Millions of student borrowers have been able to pause their loan payments since March, but some may feel unprepared to resume payments when the relief ends.
For those who need it, the break has allowed many more room to make ends meet. Others who have frozen their payment plans say it’s given them a chance to replenish their savings and extra cash to spend.
More than 22 million borrowers with direct federal student loans paused their payments in this period, according to data analyzed by Mark Kantrowitz, publisher and vice president of research at savingforcollege.com. Come Jan. 1, the relief period is set to end unless Congress acts.
Now, many borrowers are looking to adjust their budgets or change behaviors to again handle the monthly payments.
“As an adviser, I’m worried,” said Luis Strohmeier at Octavia Wealth Advisors. “We don’t think about the impact this has on people who will have to start again with payments next year.”
Here’s how to prepare.
Double-check your emergency savings
In addition to pausing payments, the Cares Act also suspended interest accrual on $1.5 trillion in student debt. This period allows borrowers to make progress on other goals such as paying down higher-interest debt or banking money for an emergency.
Now, with loan payments resuming, the opportunity to use that money to replenish emergency funds will end. Some have already prepared for this.
Chris Strong, a 26-year-old transportation engineer in Atlanta, said he felt fortunate to keep his job during the pandemic, but he took the opportunity to pause his student loan payments. He wanted to channel the $300 he paid every month toward his fledgling emergency fund.
“I got my emergency fund where I wanted it to be,” he said. “My industry is pretty safe, but if for some reason I lost my job or was unable to work, I wanted to have enough saved up to be able to get my bearings.”
Others who haven’t been able to prepare like Mr. Strong may need to do so. The coming months provide a window of time to top up savings.
Take a harder look at your cash flow
While some were able to save the money they had otherwise earmarked for student loan payments, others saw pandemic-related expenses eat up the money they hoped to save.
Lauryn Williams, financial planner and founder of Worth Winning, recommends borrowers take the coming months to carefully examine their monthly cash flow. With a new budget analysis, you can more accurately assess where that money got absorbed—and reverse that behavior before December.
William Comstock stopped payments on his student loans when he was between jobs this spring. When he got a new job in August, he didn’t resume payments and planned to put the money into savings. Instead, the money went to his usual monthly expenses.
“Things keep coming up,” he said. “And that $130 is less noticeable.”
The next two months provide time for these types of borrowers to get back on track.
“Evaluate why you’re not ready,” said Ms. Williams. “Set up the most strict and accurate budget you’ve ever set up in your life. You have to look at every expense. Even when you go to the vending machine, track it.”
Explore other relief options
Once you determine how much money your current budget allows for student loan payments, you may still find yourself coming up short. Ms. Williams recommends investigating other options that could lower your payments, like income-based repayment plans.
Be aware of the trade-offs for options such as loan refinancing, consolidation, payment deferral and extended forbearance. Ms. Williams recommends approaching these with caution: Such options often come with other requirements, like a minimum credit score, or bring their own disadvantages, like a longer period of interest accrual. For consolidation and refinancing, be aware that doing so could potentially pull you out of the forbearance period.
Schedule a call with your loan servicer to ask about available paths forward. Doing so well ahead of December will give you ample time to determine what choice is best for your situation.
Whatever option you pursue, stay realistic. Expecting a longer reprieve—or even total forgiveness, depending on the election outcome—could only set you up for disappointment and panic.
“Borrowers are hoping for a miracle,” Mr. Kantrowitz said. “But the student loan fairy may not come in time.”
Write to Julia Carpenter at Julia.Carpenter@wsj.com
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