What Does the Government Shutdown Mean for Student Loans?
October 15, 2013

The government shutdown is the topic of most headlines these days with each political party pointing their collective fingers at the other in blame. But blame won’t help those who are financially impacted by the sequester – the only thing that will is if the government gets restarted and all back pay, benefits and funds are promptly brought current. Not only are there short term effects from this government abeyance, but student loan borrowers that rely on federal funds for their livelihood can expect others that may be much farther reaching, as well.

Short Term Impact: Loan Payments

If you’re a government worker or federal contractor that has been furloughed, you may be running low on funds and don’t know when your next paycheck will come in. Ordinarily, once government business resumes after a shutdown, retroactive pay is issued, but for some furloughed workers this may not be the case (for hourly or contract workers in particular). If you don’t have enough saved up, you may not be able to make your student loan payments and this can be difficult to recover from.

Short Term Impact: Repayment Allowances

Many government jobs offer student loan repayment allowances as an employee benefit. With no money coming in to fund the agency, if you’re on furlough you won’t be getting this assistance, and whether or not the benefit is restored retroactively is a big question mark. If you rely on this benefit to afford your student loan payment (or at least a portion of it), you’ll have the double whammy of not receiving your repayment allowance, as well as losing out on your standard paycheck.

Government shutdown can cause financial problems for employees

Image source: CNN.com

Long Term Impact: Interest Rates

Now that federal student loan interest rates are tied to Treasury note yields, if interest on government instruments increases, so will the rates on newly minted loans. So what does that have to do with the shutdown? If our national credit rating is devalued as a result of this sequester, interest rates on Treasury notes may increase, which trickles directly to student loan interest. This could cost you thousands more over the life of your loans.

Long Term Impact: Delinquency, Late Fees and Accrued Interest

If you can’t afford to make your student loan payments for a couple of months because you’re not receiving your pay from the government and don’t have savings to fall back on, you may have to make choices about which bills to pay. Food, mortgage payment or rent, and utilities have to come first so you can keep your life functional. If you must choose between necessities and student loans, your educational debt will fall by the wayside. If the furlough drags on, you could end up missing months of payments, falling into delinquency and seeing late fees and additional interest accrue. This will increase your costs over the long haul.

Workers frustrated with shutdown

Image source: ABCNews.go.com

Ways to Be Proactive and Look for Solutions

If you know you will miss out on student loan payments during the furlough, there are some measures you can take to protect your finances and credit rating.

(1) You can file for unemployment immediately to get you funds to help in the interim, but this can take a week or two to process. Also, once the furlough is done, if you receive back pay you’ll have to pay back any unemployment you receive.

(2) You can apply for deferment or forbearance, but this often can take 30-60 days so by the time it comes through, the furlough may well be over and it won’t do you any good. If the shutdown lingers, though, this could come in handy.

If you’re not already signed up with a free Tuition.io student loan management account, now is the time to take care of that so you can track your loans and optimize your debt. Also check out our blog for repayment tips and news and be sure to check out our new student loan help center for a load of valuable information!