With student debt, college savings plan, what should you do with your stimulus check? ISU financial aid director offers insights
Phillip SitterMany Americans who've gotten or expect to get a stimulus payment as part of the latest COVID-19 pandemic economic relief package may also have or know they'll have college-related expenses or debt — so what's the best thing to do with a check of perhaps $1,400 under those circumstances?
The answer will really depend on each individual's financial situation, said Roberta Johnson, Iowa State University's director of student financial aid — but there are some key, universal insights.
Some added context to consider — the temporary suspension of payments and interest on U.S. Department of Education-owned federal student loans, enacted in March 2020 because of the pandemic, was extended in January to last at least through Sept. 30 of this year.
More:Trump and Biden froze federal student loans. Should borrowers pay or pause before they thaw?
President Joe Biden has also previously stated his support for Congress to forgive $10,000 of individuals' student loan debt, though he's rejected calls from fellow Democrats to cancel $50,000 worth. Either way, it's not clear if or when loan forgiveness may happen.
Americans collectively owed more than $1.7 trillion in student loan debt at the end of 2020, according to the Federal Reserve, and the average public or private nonprofit college graduate in 2019 owed an average of $28,950, according to The Institute for College Access and Success.
Whether it's debt or trying to save for future college expenses, Americans have also had to think about it all during the economic and social upheavals and job losses of the pandemic that spurred economic stimulus packages in the first place.
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Understand your student debt or college savings plan
Johnson could not immediately estimate how many ISU students would get a stimulus payment on their own versus as a financial dependent of their family. She said the only way to know whether a student is a dependent is if they’ve completed the Free Application for Federal Student Aid, or FAFSA, and not every student is eligible to do that or feels the need to.
Whoever's handling a stimulus payment, Johnson said that if a student is taking on debt in college and knows they'll graduate with debt that's more than the stimulus could cover, it's important to consider how much time there is before graduation and what kind of debt the student has before deciding what to do with a stimulus payment.
A college freshman with three or four years ahead of them may want to set aside money for expenses yet to come, “with the idea being if you have that cushion available to you, then you potentially do not need to borrow as much in the future," Johnson said.
Most federal student loans have a six-month post-graduation grace period before payments are required — a grace period that, for a class of 2021 senior graduating in May, would end after the current end date for the temporary suspension of payments and interest in place because of the pandemic.
Johnson said a college senior graduating in May who is planning to move to another city might get more mileage out of their stimulus by putting it toward expenses such as first and last month's rent that might soon be coming due. Someone staying close by or that won't have those expenses might want to instead evaluate based on the interest accruing on their loans.
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Subsidized loans do not have interest accrue on them while a student is in school, so Johnson said it doesn't make as much sense to pay that debt early in one's academic career as putting together a savings plan.
However, she said if someone borrowed heavily through unsubsidized or private loans that do accrue interest while enrolled in school, it might be better to pay off that interest — especially if a private loan's interest regularly recapitalizes and is added to the loan's balance.
A family whose child is years away from college but that is conscious about saving for their child's education might also be wondering how best to use a stimulus payment.
The safest option is a savings account, but those are not earning a lot of interest at the moment because of the economic policy response to the pandemic.
A certificate of deposit will probably have a higher interest rate than a savings account, but a 529 plan will be better yet, Johnson said.
She said 529 plans can be invested in and set to a family's risk tolerance for their investment. If a family invests even just a couple hundred dollars many years before their child is college-age, that could really grow their money.
You can ask for consideration of your changed economic circumstances
Johnson said ISU's financial aid office has a couple of financial success coaches — counselors with additional financial literacy training — and any student can come with questions about financial issues, regardless of whether they've completed the FAFSA or would be eligible for financial aid.
Most of the office's appointments are still being done virtually.
Anyone who missed the priority aid deadline for filling out their FAFSA can still at least complete the form, and Johnson said it may be good to have the form on file in case circumstances change and someone needs financial aid when they didn't before.
She also said that because stimulus payments are not taxable, that income should not impact someone's financial aid eligibility.
Financial aid eligibility through the FAFSA for the current 2020-21 school year is based on information from 2019.
“We know a lot of things happened in 2020, and families’ incomes that they earned in 2020 might not look anything like it did in 2019," so Johnson added that families who've had radical changes in their financial situations can contact their office to submit an appeal to the Department of Education to have their changed circumstances considered in their aid eligibility — a process known as professional judgment review.
Phillip Sitter covers education for the Ames Tribune, including Iowa State University and PreK-12 schools in Ames and elsewhere in Story County. Phillip can be reached via email at psitter@gannett.com. He is on Twitter @pslifeisabeauty.