Student Loan News: Borrowers May Face Problem As Stimulus Checks Arrive

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Welcome to Student Loan News, a weekly summary of developments and events affecting college debt in the U.S. Join us each Friday for a look at goings-on that could impact your own student loan situation.

Relief check at risk of being seized, but not by government

As Americans begin to receive the first stimulus checks budgeted for in the Coronavirus Aid, Relief and Economic Security (CARES) Act, some will have to decide the following: spend, save or … apply to student loan debt?

Although most college students won’t receive the check of up to $1,200, many indebted consumers who have left school could see the relief check land soon in their bank accounts or, eventually, arrive via snail mail. Borrowers with federal student loans in default won’t have to worry about Uncle Sam seizing the windfall, the USA Today reported.

But private debt — student loans or otherwise — is another story. Progressive nonprofit publication The American Prospect noted that creditors could nab the stimulus funds, a process made particularly easy if the payment is directly deposited to a bank where the borrower has outstanding debt.

For struggling borrowers, $1,200 could go a long way toward calming more immediate concerns, such as food or housing. For better-off borrowers, however, $1,200 could make a noticeable dent in their debt repayment. Federal loan holders without accrued interest on their balance, for example, could apply the four-figure amount entirely to their principal, shortening their repayment term.

How it affects YOU: To determine how far your relief check (if you receive one) could go toward whittling your education debt, check out our lump sum extra payment calculator. If you owe $35,000 and have an average interest rate of 5%, for example, submitting a $1,200 payment would shave five months and more than $700 of interest off your loan repayment.

Of course, before you rush to make a supplementary payment on federal loans eligible for the student loan interest waiver and payment suspension, question whether resuming repayment is right for your finances. Applying your extra cash toward any higher-interest debt, including private student loans, is likely a smarter bet. You might also use the CARES Act stimulus relief to rebuild your emergency fund if you’ve had to empty it in recent weeks.

Not sure if you’ll receive a stimulus payment? Check out the IRS’ “Get My Payment” tool and other resources.

Also in the news …

  • In case you missed it, former vice president and presumptive Democratic presidential nominee Joe Biden revealed late last week that he would expand his student loan forgiveness proposal to wipe away public school debt for borrowers earning up to $125,000. Compare the 2020 presidential candidates’ higher education platforms with our pre-election primer.
  • Education Secretary Betsy DeVos settled a long-standing lawsuit that alleged her changes to borrower defense to repayment were illegal, PBS and other outlets reported. As part of the agreement, DeVos agreed to process nearly 170,000 applications for the federal student loan forgiveness program within 18 months.
  • Politico reported DeVos also said late last week that almost $6.3 billion in stimulus relief would be distributed to schools and, indirectly, to students in the form of emergency grants, which we detailed previously.
  • Colleges and universities are considering keeping in-person classes off the menu until 2021, CNN reported. And The Wall Street Journal documented how the students left on campus are dealing with the physical absence of their classmates.
  • The SAT and ACT college entrance exams are expected to resume this summer, according to Inside Higher Ed. Some schools are going test-optional, one of the many ways the pandemic has affected college admissions.
  • A new tool called SwiftStudent launched to help families negotiate financial aid with their schools.

News can be useful, but if you want some deeper advice, take a moment to sign up for the Student Loan Hero weekly digest email and get valuable financial knowledge sent straight to your inbox … for free!