The new stimulus package can help you pay off student loans faster.
Here’s what you need to know.
The new $900 billion stimulus package that President Donald Trump signed into law has several benefits, including a second stimulus check, enhanced unemployment benefits and small business loans. If you’re one of 45 million borrowers with student loan debt, then you may be wondering whether Congress included any student loan relief in the stimulus bill. What changes can you expect for your student loans in 2021? Here’s what the stimulus package means for you student loans:
1. Your employer can pay off your student loans
The Cares Act — the $2.2 trillion stimulus passed in March — provides a tax incentive for your employer to help pay your student loans. That’s not a typo. Your employer can make tax-free student loan payments on a qualified education loan up to a maximum of $5,250 for each employee. This includes both federal student loans and private student loans. In the new stimulus package, Congress extended this student loan relief for five years through December 31, 2025. In addition to helping with your student loan repayment, you can save income taxes and your employer can save payroll taxes. Check with your employer to determine if your employer offers this student loan benefit.
2. Use your $600 stimulus check to pay off student loans
The new stimulus package includes a $600 stimulus check for each individual taxpayer with an adjusted gross income of $75,000 or less, or a $1,200 stimulus check for married or joint filers with an adjusted gross income up to $150,000. Higher income earners may be eligible for a smaller stimulus check. Dependents age 16 and younger may be eligible to get a $600 stimulus check too. While you can spend, save or invest your stimulus check, another option is to pay off student loan debt. You can choose whether to pay off federal student loans, private student loans or both. It’s likely that a $600 stimulus check won’t solve all your student loan problems—but it can certainly help.
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While federal student loans are temporarily paused through January 31, 2021, you can still make an extra student loan payment to lower your principal balance. Contact your student loan servicer in writing regarding your plan to make an extra student loan payment. Your extra student loan payment will first be applied to any outstanding accrued interest. Once your accrued interest is paid, or if you don’t have any accrued interest remaining, your student loan payment will be applied toward your principal balance. The faster you can pay off your principal balance, the faster you can pay off student loans. Why pay off federal student loans now if you don’t have to? Currently, there is no new interest accrual on your federal student loans, meaning no new interest is being added to your student loan balance through January 31, 2021. So, assuming you pay off any past accrued interest, your stimulus check could be applied directly to reduce your principal balance.
3. Student loan forgiveness dropped from stimulus package
Will your student loans get cancelled? It’s a popular question that student loan borrowers ask frequently. If you’re looking for student loan forgiveness in the new stimulus package, it’s not there. Congress dropped student loan forgiveness from the stimulus package. The Heroes Act, which is a stimulus bill that House Democrats passed last year, would have cancelled $10,000 of student loan debt for borrowers who are struggling economically, particularly in the wake of the Covid-19 pandemic. Democrats rallied around this provision for most of last year. However, the final stimulus package did not include any policy to cancel student loans.
This latest student loan development hasn’t deterred members of Congress from lobbying to cancel student loans. For example, Sen. Elizabeth Warren (D-MA) and Senate Minority Leader Chuck Schumer (D-NY) want to cancel $50,000 of student loans for every student loan borrower who earns less than $125,000 annually. However, they want President-elect Joe Biden to cancel student loan debt through an executive order. There are at least two practical challenges with their proposal. First, Biden wants Congress, not the president, to cancel student loans. Biden has called on Congress to cancel student loans immediately. The second is that Biden doesn’t support $50,000 of student loan debt cancellation; he wants $10,000 of student loan debt cancelled for each borrower. Watch the outcome of the two Senate races in Georgia this week, which will decide whether Democrats or Republicans control the U.S. Senate and ultimately influence whether student loan debt cancellation becomes law.
How to pay off student loans faster
What’s the best way to pay off student loans? There are many paths to student loan repayment, and it depends on your financial goals and personal circumstances. While the stimulus package includes some student loan relief, there’s no student loan debt cancellation. That’s why it’s critically important that you create a student loan debt repayment plan so you can pay off student loans faster. Start with these three options, all of which have no fees: