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The payment freeze on student loan payments prompted by the COVID-19 pandemic is set to come to an end on August 31, 2022. And when it does, borrowers will need to plan how they’ll resume making payments, and what options they have when it comes to handling their college loan debt.
Some will choose to refinance their student loans, as rates remain pretty low for qualified borrowers (see the lowest student loan refinancing rates here). That said, refinancing a federal student loan into a private one will strip you of federal protections like income-driven repayment options and federal loan forgiveness, so it’s important to consider the pros and cons before you refinance.
Others will look into income-driven repayment plans, ask for a forbearance, or consider loan consolidation. And still others will simply create a budget and get down to business with aggressively paying off their loans. These options are just the beginning, and this article will go into what exactly happened with the student loan pause, and then how you can prepare for its ending when you have to begin repaying your loans. Here’s what you need to know now.
Pre-COVID-19, student loan forgiveness was mostly limited to two programs aimed at borrowers who worked as teachers or in other areas of public service, such as government jobs or at nonprofit organizations. If your job qualified and you followed all the rules, a significant amount of your student loan debt would be wiped out with no need for you to repay the balance.
In addition to loan forgiveness, borrowers could apply for one of several income-based repayment programs that could trim or limit their loan payments. There also were a number of conditions in which borrowers could have their loans discharged or canceled. These included, for example, if their school closed before they could graduate, or if they had been defrauded or deceived by their schools, typically a number of shady for-profit colleges.
Then the Covid-19 pandemic hit.
With the U.S. economy thrown into a tailspin that put millions of people suddenly out of work, the Trump administration implemented a temporary freeze on federal student loan payments, starting in March 2020. The measure suspended loan payments, halted collections on defaulted loans and temporarily set the interest rate to 0%; and since March 2020, it has been extended six times. What’s more, as of May, an estimated $125 billion in loan payments were canceled, with additional benefits going to borrowers in loan forgiveness programs.
The federal pause didn’t apply to privately held student loans, except in the case of Federal Family Education Loans Program (FFELP) in default status, which were put on hold in March 2021. Some private lenders did offer their own pandemic-related relief measures, but those have largely ended.
One particularly noteworthy benefit of the freeze is that even with payments suspended, those borrowers enrolled in Public Service Loan Forgiveness or other federal forgiveness programs will still be treated as if they had continued making payments. In the case of the public service program’s 10-year repayment schedule, for example, each month of the payment pause counts as if the borrowers had kept up their repayments.
The pandemic pause has been extended multiple times as the world continues to grapple with variants of the pandemic virus, with additional relief granted in March 2021 to borrowers seeking a loan discharge because of total and permanent disability. The last extension of the overall payment freeze was issued in April and set Aug. 31, 2022, as the end of the pause. The Biden administration also announced in July that plans were in the works to revamp several of the major student loan discharge programs.
While there’s always the chance that the payment freeze might once again be extended, borrowers should plan to start making regular loan payments again starting Sept. 1. Here is what borrowers should consider:
It’s time to start thinking about how you will make payments when the payment pause ends. Firstly, make sure you have updated your contact information with your lender so you can get all the important updates on your payment obligations. Beyond that, here are some things to consider:
While you’re still free from making any payments or seeing your wages garnished for collection, consider bringing defaulted loans current if you can. Rehabilitating your loan will halt garnishment and other collection actions, such as having your tax refund seized. It also allows you to access benefits such as deferment, forbearance, a choice of repayment plans and loan forgiveness.
For borrowers with a Federal Direct, Federal Family Education (FFEL) or Perkins Loan, contact your loan servicer to start the process. You’ll be required to state in writing that during the next 10 months you’ll make nine payments within 20 days of the due date for a Direct or Family Education Loan. The time period is nine months for a Perkins Loan.
The payments should be reasonable for your financial situation, which is 15% of your discretionary income divided by 12. If that’s still more than you can afford, ask your servicer to review your documented income and expenses to see if you can arrange a lower payment amount. There’s more involved, so check StudentAid.gov for more details.
If it’s possible to set aside the money you’d usually be paying on your loan, as well as any other extra cash, add it to your emergency fund (or start one). Once your student loan payments start again, you’ll have less wiggle room in your budget and having even a few hundred dollars set aside can help you handle unexpected expenses and stay current on your loan.
Even though interest rates are heading up, refinancing your loans with a private lender might lower your payment. However, refinancing to a private loan means you’ll give up the opportunity to take advantage of federal options, such as special reduced repayment plans or loan forgiveness programs. (See the lowest student loan refinancing rates here.)
Review your potential savings and, if you’re in a stable financial situation where you know you’ll be able to make timely payments during the term of the loan, refinancing may make sense. If you owe a substantial amount of student debt and think your financial situation might change, you’re likely better off keeping your federal loans untouched.
Most student loan borrowers start out paying the full amount of their loans over a period of 10 years to 30 years, but you do have several flexible options, which you can find listed here.
One of the most sensible is the income-driven repayment plan, which reduces your loan payments somewhere between 10% and 20% of your discretionary income, based on the size of your family and household earnings.
If you hadn’t considered this option before the pandemic it’s worth doing now, and makes even more sense if your financial situation or family size has changed during the payment pause. If you already were on an income-based plan and your situation changed, you can ask to have the payment recalculated. You can find the application for the income-driven repayment plan here.
Some people are better off financially since the pandemic, thanks to the student loan payment pause, pandemic relief money and the savings on commuting costs that comes with working from home. But many other borrowers are in worse financial shape after they became ill, lost childcare, or because businesses closed or laid off workers. In that case, look at the various student loan forbearance programs. They’re not permanent but they can help you out in tough times. They include:
You have to apply for these benefits, and there’s no guarantee you’ll be approved. In addition, you may have to pay fees, and uncollected interest from the forbearance usually is added to your loan balance (a process called “interest capitalization”). In addition, a forbearance may be reported to credit bureaus and hurt your credit report.
You can consolidate your direct federal loans into one new loan, which can be put on an income-driven repayment plan. This can lower your payments by giving you a longer loan term and can give you access to additional income-based repayment plants. But consolidation also means any unpaid interest is added to your loan balance through capitalization, so you’ll be paying interest on that interest. For a look at all the pros and cons, go here.
If you’ve come into a windfall, landed a big raise or have enough cash on hand, paying your loans off as soon as possible will save you money that would have gone to cover interest, and free up cash for your monthly budget.
As loan repayments get re-started, a good move is to check with your loan servicer and make sure your contact information and loan records are accurate and up to date.
In addition to any possible extension, the Biden administration has announced changes to several of the Dept. of Education’s loan discharge programs. The proposed moves include changes to the loan discharge program for borrowers whose schools closed or lied to them; changes for borrowers who are totally and permanently disabled; and changes for public service workers who have met their commitments under the often troubled Public Service Loan Forgiveness program.
Another proposed improvement for borrowers would stop many instances of interest capitalization, where a borrower’s unpaid interest is added to the principal balance of the loan. Capitalization increases the total amount they owe and on which they pay more interest.
Finally, the Education Department recently proposed regulations to give borrowers a chance to go to court if they have disputes with their colleges. You can find the full announcement here.
According to EducationData.org, the average monthly student loan payment is an estimated $460, with the average borrower taking about 20 years to repay their student loan debt.
There are a number of ways to increase your income or slash debt to help you make those student loan payments. Some options might include: asking for a raise at work; looking for a better-paying job; starting a side gig to earn extra money in your spare time; selling items you own but no longer want.
It’s also smart to slash your debt. One way to do it: Make a list of your debts from the highest interest rate to the lowest, and then pay as much as you can on the highest interest rate debt, and the minimum on all others, until the debts are repaid.
PSLF is a government program that offers loan forgiveness for those employed by a U.S. federal, state, local, or tribal government or not-for-profit organization. The program “forgives the remaining balance on your Direct Loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer,” the government explains. Here are the details.
In October of 2021, the government announced a temporary change to the PSLF program rules due to COVID-19. “Now, for a limited time, borrowers may receive credit for past periods of repayment that would otherwise not qualify for PSLF,” the administration writes. “Past periods of repayment will now count whether or not you made a payment, made that payment on time, for the full amount due, or on a qualifying repayment plan.” You can see the details here.
More specifically, this waiver will let student borrowers count all the payments made on loans from the Federal Family Education Loan (FFEL) Program or Perkins Loan Program, while waiving restrictions on the type of repayment plan and the former requirement that you had to make payments in full and on-time. To get this benefit, you have to submit a PSLF form by October 31, 2022. Note that borrowers who currently have FFEL, Perkins, or other non-Direct Loans can get the benefit of this limited PSLF waiver if they apply to consolidate into the Direct Loan program and then submit the form.
This program allows borrowers with federal loans that were delinquent or in default pre-pandemic to have these loans returned to “current status” when the student loan payment pause ends. The defaulted or delinquent loans will also be removed from the borrower’s credit reports. You can see details here.
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