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How to Budget Student Loan Payments after the CARES Act Expiration

The CARES Act pause on student loan payments was a lifeline for so many people during the pandemic, but with payments set to restart on Aug. 31, 2022, adding student loans back into your budget could be a big challenge.

Here’s how you can build a new budget to set yourself up for financial success once payments restart next year.

The ‘Best’ Way to Budget

There are a lot of schools of thought on the “best” way to budget, but ultimately whatever works for you is the way to do it. The end goal is simple: Don’t spend more than you earn, but that can be easier said than done.

If you’ve never made a budget before and you’re looking for a place to start, the standard rule of thumb is to keep your rent costs under 30% of your income. Talk to your landlord if your rent is too high—many people moved away from cities during the pandemic, and those who stayed have been able to negotiate significant rent savings just for staying put. Offering to sign a longer lease or renew your contract if you’re currently on a month-to-month basis may be a good bargaining chip.

You could also consider student loan refinancing to bring down your interest rates or get a lower monthly payment. If you’ve been making all of your payments on time and you have a good credit score, it could be a good option. However, remember that refinancing means you will not qualify for any federal aid, including any future student loan forgiveness programs. If you’d like to see how much you could save, you can get a free rate estimate from Earnest in 2 minutes without any impact on your credit score.

Ideally, you want to have at least six months’ worth of living expenses in savings—including student loan payments, car payments, credit card bills. However, that’s not always a realistic goal. If you’re not great at saving, focus on putting away a small amount each month and don’t beat yourself up if you don’t have six months of expenses put away. Most people don’t.

How the CARES Act Changed Budgeting

Congress passed the CARES Act in March 2020 to offer student loan debt relief in the face of the coronavirus pandemic. All federal loans automatically went into a forbearance period, with no payments due and 0 percent interest. The payment pause was initially slated to expire in September 2020, but was extended several times and now ends Aug. 31, 2022. President Joe Biden has said there won’t be another extension.

The average borrower pays nearly $400 per month on student loan repayment, according to data from the federal government published in 2017. Pausing debt repayment for nearly two full years has been huge for individuals and families who needed that extra cash to survive during the pandemic. Others have used the pause to make payments on their principal balance, pay down private student loans or save money.

Now that the CARES Act’s administrative forbearance is ending, borrowers have to figure out how to make those payments again. One significant benefit of federal forbearance has been the 0 percent interest rate, but that is also projected to end once the CARES Act ends. For borrowers, this means that they will have to pay their original interest rate on Federal student loans.

What to Do if You’re Not Sure Whether You Can Make Your Payments

Whatever your situation has been in the past two years, it’s likely you made some changes once you were no longer forced to make payments on your student loans. Here is how you could reincorporate these bills into your spending.

Here’s a simple example based off a take-home salary (after taxes) of $50,000 per year and average costs for common expenses:

Take-home pay: $4,166 / month
Rent and utilities: $1,250
Wifi: $61
Groceries: $350
Student loan payment: $400
Car payment (used car) + insurance: $540
Gas: $250
Health insurance: $500
Cell phone bill: $70
Clothing: $160
Savings (10% is a good goal): $400 / month

Left over: $185

How to Start Your Personal Budget

If you’re new to budgeting, or if you’re creating a new budget from scratch to reintegrate your student loan payments, give yourself some time to figure out where you need to make changes. Instead of starting with arbitrary numbers based on other people’s average expenses, study your own spending habits.

Pull out last month’s credit card and bank statements, and make a spreadsheet listing every single thing you spent money on. Google Drive has a great template tool for budgeting that you can adapt to fit the specific categories you need, like if you’re currently paying for a coding bootcamp or if you have childcare costs, or if you’re saving up for something separate from your emergency savings fund.

It can be helpful to do this exercise for a few months’ worth of data to see what you normally spend and how much you usually have left over. If you need to cut something out to free up funding for student debt payments and you’re not sure where to cut, it may be helpful to analyze which expenses felt good or productive and which ones felt excessive or unnecessary. Maybe you can have more coffee dates and fewer nights out, or maybe you don’t actually need certain subscription services for music or books and can find free alternatives from your local library.

Once you’ve analyzed your data and have a good sense of how much money you typically spend on groceries, eating out, cell phone bills, and so on, you can create a budget that’s realistic. It will be harder to follow your budget if you set unreasonable expectations for yourself—say, cutting out restaurants cold turkey if that’s currently a big part of your social life.

If your student loan payments are too high to comfortably fit within your budget, you have options. The federal government offers certain protections, like income-based repayment, income-driven repayment (IDR), and deferment, which can help you in the short-term. If you work in qualifying public service industries, you may also be eligible for Public Service Loan Forgiveness, or PSLF. You can learn more about PSLF at studentaid.gov.

Student loan refinancing can also help lower your monthly payments. You may want to refinance with a student loan servicer that offers low rates to help pay off your loan faster or save on monthly payments.

Take Advantage of Your Repayment Options

Right now, we’re seeing historically low interest rates. If you can’t fit your loan payments in your budget, refinancing for a lower interest rate could help. Those who are public servants or others with eligibility for forgiveness may want to wait, but for others who need a more affordable repayment plan, a private lender refinance may save you significant money on interest over time.

If you’re curious about refinancing, Earnest has some of the lowest rates and you can check your rate in 2 minutes without any impact on your credit score.

Check your rate in 2 minutes
Check your eligibility for Earnest student loan refinance
Visit the U.S. Department of Education to get the latest updates for federal student loan borrowers.

The CARES Act payment pause offered student loan relief to millions of borrowers who struggled to pay their bills during the COVID pandemic. The expiration of the CARES Act is coming up, in late January, and can be tricky for people whose financial situations have changed.

Coming up with a repayment plan now, will help you avoid financial stress later. If your student loans no longer fit into your budget, you still have time to make a new plan, either by refinancing or seeking help from the federal government loan servicers who manage your loans. Whatever you do, make sure you’re realistic. And don’t be too hard on yourself—you’re not alone.

 

 

AN UPDATED NOTE FOR BORROWERS WITH FEDERAL STUDENT LOANS: On April 6, 2022, the U.S. Department of Education announced a final extension of the student loan payment pause until Aug. 31, 2022. We want Earnest customers to explore all their options before applying to refinance their federal student loans. Refinancing a federal student loan with a private lender means you will no longer have access to benefits of your federal loans, including the temporary 0% interest rate and suspension of payments effective through Aug. 31, 2022 on federally held loans, or any other relief measures implemented for federal loans to address the COVID-19 crisis. Please carefully review your current and potential benefits with your federal loan servicer before refinancing.

Before applying for private student loans, it’s best to maximize your other sources of financial aid first. It’s recommended to use a 3-step approach to assembling the funds you need: 1) Look for funds you don’t have to pay back, like scholarships, grants and work-study opportunities. 2) Next, fill out a FAFSA® form to apply for federal student loans. Federal student loans do not require a credit check or cosigner, and offer various protections if you’re struggling with payments. 3) Finally, consider a private student loan to cover any difference between your total cost of attendance and the amount not covered in steps 1 and 2. For more information, visit the Department of Education website at https://studentaid.ed.gov

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Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.