5 more months of relief for student loan borrowers

The extension of the moratorium on federal student loan payments, announced by the White House on Friday, August 6, gives borrowers additional time to revisit their payment plans and consider modifications. The forbearance provisions are now due to expire on January 31, 2022. As of this writing, this appears to be the final deadline.

This extension is an opportunity for financial professionals to connect with clients who could potentially benefit from the continued pause in monthly student loan payments and 0% interest rates. With the window open for another five months, borrowers may be able to revisit their debt payment plans and potentially free up income that can be directed toward other financial priorities.

Planning in times of uncertainty

The extension of the payment moratorium will be welcomed by many clients who have outstanding federal student loans, including parents who took out loans on behalf of children or other dependents. The announcement also underscores the necessity of having a plan and sticking to it in times of uncertainty.

Many of the decisions made in Washington D.C. can have trickle-down impacts on your clients’ financial plans. Because of the uncertainty around what direction politicians may choose, clients often feel paralyzed when making their own financial planning decisions.

Outside forces such as political decisions can bring emotion into the financial planning process. That could lead to taking impulsive actions or even no action at all, which sometimes can be just as problematic to their long-term financial success.

For example, uncertainty about the future can create inertia that may prevent clients from starting to invest. The cost of waiting for the right moment can cost thousands of dollars in lost savings over the long term. A $5,000 contribution made today to a tax-deferred retirement account (e.g., a 401(k) or IRA) would grow to more than $50,000 in 30 years, assuming an 8% annual growth rate. However, waiting just five years reduces the ending account value by over 30%. Waiting 10 years or longer lowers the ending account value by more than half.

Don’t forget other financial priorities

Financial professionals can help clients find balance between managing outstanding debt and planning for your future financial needs. Those needs could include covering short-term expenses, building an emergency fund, purchasing life insurance or saving for retirement.

When clients are able to revise their student loan repayment plans to lower their payments, they can then consider how the freed-up income could be used for other financial planning needs.