The third round of stimulus checks landed in bank accounts this week, and eligible families of high school seniors and college students may have seen a significantly larger number this time around. College Confidential checked with Andrew Pentis, Senior Writer at Student Loan Hero, for some thoughts on how the stimulus money from the American Rescue Plan could be used.
Not only did the third round of stimulus checks mean more money per person than either of the past two checks, but this was the first time that dependents between the ages of 17 and 24 were eligible to receive money, which will go directly to the taxpayers in the family. An estimated 13.5 million more people qualified for payments after the definition of dependents was expanded, and this group is mostly high school and college students, as well as other dependent adults.
In the past, 17-24 years olds who rely on their parents for support were not eligible for stimulus money, even though many from this group are struggling to makes ends meet during the pandemic. In a survey conducted by Student Loan Hero in August 2020, 81 percent of the college students said that they were experiencing financial difficulties due Covid-19, and over a quarter said they were struggling to pay bills or feed themselves. Some of this struggle may have come from financial stress at home if parents experienced a loss in income. But one in four college students reported they lost a job themselves during the pandemic, perhaps because many students work in restaurants, bars, or other venues that were hit the hardest by shutdowns and social distancing orders.In a different Student Loan Hero survey conducted in July of 2020, 36 percent of current student loan borrowers reported experiencing food insecurity; that number jumped to 46 percent for borrowers with children under the age of 18. So for many, this most recent stimulus check will go directly to basic living expenses, like food, housing, and childcare. In addition to providing direct payments to qualifying people, the stimulus package in the American Rescue Plan Act includes $40 billion in for colleges and universities, with the stipulation that at least half of that funding go directly to providing emergency financial help for students. According to Andrew Pentis from Student Loan Hero, "Current students on the lower end of the income spectrum should be helped considerably by the American Rescue Plan Act. If you're a low-income student worried about whether you can make your next tuition payment and stay enrolled, ask your financial aid office about your eligibility for need-based funding made available by this latest legislation."
For families who are able to cover their basic expenses and don't have high-interest debt to pay off, the stimulus money could help offset the high cost of college. Andrew Pentis shared some thoughts with College Confidential about how families with current, future, or past college students can use their stimulus money strategically. According to Pentis, "No matter where you are in school or in repayment, it's wise to prioritize your most pressing personal financial challenges before simply redirecting your $1,400 payment to a school or lender. If your emergency savings fund was depleted some months ago by the pandemic, for example, $1,400 might fully replenish your rainy day account. Or perhaps your $1,400 payment would be better applied toward higher-interest debt, such as balances for credit cards or auto loans."
Families with elementary or middle school aged children may consider putting their children's share of the stimulus money into a college savings account, ideally a tax-free 529 plan. According to one 529 savings calculator, if the $1400 was deposited in a tax-free 529 plan for an 8th grader now, it would be worth an estimated $2000 by the time the student is ready for college, depending on how the market performs. For an elementary school-aged child, the original amount of the stimulus check could nearly double by the time the child is ready for college. If you haven't opened a college savings plan yet, be sure to research the options and choose the best one for you.
For high school juniors and seniors who are planning to start college in the Fall of 2021, the stimulus money would not have enough time to accrue significant interest in a college savings plan. Instead, juniors may want to use the money for the costs associated with applying to college. It could be put aside for application or admissions test fees, but first check to see if your family qualifies for fee waivers. Or, you could save the stimulus to help with the cost of visiting your top-choice schools next Spring.
For seniors who are planning to take out unsubsidized loans or private loans to bridge the difference between the total cost of school and what their family can afford, this extra money could save you on interest accrued during school if you are able to take out a slightly smaller loan. Or, incoming college students may want to deposit all or some of the amount in a checking account that is earmarked for some of the extra costs of college, like travel to and from school, a computer, or books, which are often more expensive than families planned for, and can end up a high-interest credit card if not budgeted for ahead of time.
For students who aren't struggling to cover housing costs or food, the $1,400 windfall from the IRS could help you cover the cost of the semester's tuition, or cut down on the interest in the future. Current students aren't usually required to make payments on their loans while in school, but paying down any unsubsidized or private loans, which begin accruing interest during school, could cut back on the interest your loans will accrue over time.
Some students may prefer to save the money in an emergency fund. Many of the seasonal jobs that traditionally help students cover the costs of college life, like working in a restaurant or at a summer camp, may not be as readily available this summer. It may be wise to set aside some of the stimulus money to help cover the cost of living expenses in the next year, especially if you're living off campus and not on your school's meal plan. And if you do find a great job or don't end up needing the money for living expenses, make a payment towards the next term's tuition or any loans that accrue interest while you're in school.
Nearly half of the current college seniors surveyed said they're concerned about finding work after college. If you're one of them, save the stimulus money for any post-graduation expenses that would otherwise go on a high-interest credit card. If you're planning to move to a new city or get an apartment after college, remember that those types of life transitions are often more expensive than anticipated, and it's much harder to pay off credit card debt than student loan debt. But if you don't need the money to cover living expenses, put it aside to cover your first few months of loan payments, which are usually due about six months after graduation. The peace of mind that comes from knowing that your loans will be covered for a few extra months as you find your financial footing in a rocky economy is a solid investment in your future.
Not-so-recent college graduates who are struggling financially have some options right now. Pentis reminds us that "The payment suspension and interest rate freeze first enacted by the Trump Administration in March 2020 was extended by the Biden Administration through September 2021, giving millions of federal loan borrowers an 18-month, penalty-free break from submitting monthly payments." This change should have been automatic for all borrowers whose loans are owned by the U.S. Department of Education (ED), and is intended to help borrowers cover living costs during the pandemic or refresh an emergency fund, but it could also help borrowers save money by paying off other higher-interest debts sooner.
If you have federal loans that are not eligible for the 0 percent interest period, like FFEL loans owned by commercial lenders or Perkins loans that are owned by the school you attended, research consolidating your federal loans so that they also are eligible. To check to see which of your loans are eligible, log-in to StudentAid.gov, and under the Loan Breakdown section look for any loans that don't say "Dept of Ed" next to them. Before making any changes, compare the interest rates on the loans after the interest rate freeze is over to make sure it's a savvy financial move in the long-term.
The stimulus money is intended to help people meet their basic needs for food, housing, and health care as we continue to battle the pandemic. For students and their families who have their basic needs met, the little bit of extra income can be invested in a 529 plan for the future, used to pay off loans, or put towards an upcoming tuition payment.
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