Federal student loan payments were originally deferred in 2020 as a result of the global pandemic and economic hardship many Americans faced. This forbearance period was extended multiple times as the pandemic worsened and more Americans faced job loss and other financial challenges.
When President Joe Biden took office in January, relief measures were further extended until October 1st, 2021, which is currently when federal student loans are expected to resume their typical payment schedules.
What does this extension mean for student loan borrowers who are struggling financially? And what should you do if you are able to make student loan payments? I’ll run you through how you should react to the latest legislation and help you prepare now for fall repayments.
Timeline of federal student loan extensions
In March of 2020, federal student loan payments were all placed into forbearance in order to offer Americans temporary financial relief. As the pandemic worsened and more Americans faced unemployment, forbearance measures were extended.
Here’s a quick look at the timeline of student loan forbearance over the past year:
- March 20th, 2020: Federal student loans were placed into temporary forbearance. A 0% interest rate was applied to all loans during this period. The federal government even halted collecting payments on loans that had defaulted.
- March 27th, 2020: The CARES Act (Coronavirus Aid, Relief, and Economic Security Act) is passed, extending the initial relief until October 1st, 2020.
- August 8th, 2020: The federal government extends the above relief through the end of 2020.
- December 4th, 2020: The federal government extends the above relief through the end of January 2021.
- January 20th, 2020: The federal government extends the above relief until October 1st, 2021.
We’ll keep you updated of any changes to this timeline as we move forward.
Student loan forbearance details
While higher education loans are in a temporary state of forbearance, the interest rate on all eligible loans has been lowered to 0%. This means you will not be accruing interest during the freeze and, if you aren’t currently paying, you’ll pick up right where you left off before the temporary forbearance measures were put into place.
Which loans are included in the freeze?
The federal student loan forbearance order set a freeze on all federally-held loans and approximately 85% of all federal loans. The difference is there are some loans that are guaranteed by the government but are held by other lenders. Those loans, most of which were released prior to 2010, are not included in the temporary forbearance relief, because they are held by outside loan servicers.
All other federal student loans, including federal direct loans and Parent PLUS loans are included in this economic relief measure.
Prepare now for federal student loan repayment
Even though student loan repayments have been frozen until the fall of 2021, it’s important to prepare now for a qualifying repayment plan, so your budget is set. This is particularly important if you hold a loan that was in default prior to the freeze.
No matter your financial situation or loan status, I’ll walk you through the best way to prepare.
Here’s what to do if you’ve not been financially impacted this past year
While millions of Americans were impacted financially during the pandemic, some were left relatively untouched financially. Maybe you were already working remotely or your job transitioned to a remote lifestyle easily. Whatever the case, if you were not impacted financially, you have a few options.
If you have other debt
One of the best aspects of the federal student loan freeze is the 0% interest rate. Since your loans are not accumulating new interest, if you have other debt you’ve been worried about paying, now might be the perfect time to reroute the money budgeted for your student loans into other debt payments.
This can be particularly significant if you have credit card debt or personal loan debt with a high-interest rate. Paying down this debt first might end up saving you thousands in interest and help boost your credit score. Just be sure to make a plan to reroute these funds to your student loan payments by October.
If you do not have an emergency fund
Many of us realized how important an emergency fund is during the 2020 pandemic. Knowing you have money available to help pay necessary expenses can offer you peace of mind and financial security if you lose your job or experience additional financial hurdles.
If you’ve found it difficult to build savings in the past and still do not have a significant emergency fund, now is a great time to build one. Reroute the money you would typically put towards student loans to build a nest egg that can protect you in case of financial hardship. I typically recommend striving for 3 - 6 months' worth of expenses when building an emergency fund, but having at least $1,000 available for emergencies is ideal.
If you can afford to make student loan payments
Your federal student loan payments automatically stopped during the freeze, but if you’re able to keep making payments, it can be beneficial. Since the interest rates are set at 0%, you’ll be paying down on the loan principal, which can help you pay your loan off faster. In fact, if you can afford it, it can even be beneficial to make additional or larger payments, to help reduce your debt while no interest is being accumulated.
Here’s what to do if you’re facing financial hardship
If you were struggling to pay back your student loans prior to the freeze or if your financial situation has changed since the pandemic, you might be feeling anxious about repayment in October.
It’s important to take steps now in order to prepare for repayment, so you can ensure you’re financially ready and not caught off guard.
If you can’t meet the minimum payment
First, you’ll want to log into your student loan portal to remind yourself what your minimum monthly payment will be. If your financial situation has changed, you’re working reduced hours, or you’re unemployed, you might not be able to afford this amount. In this case, it’s important to reach out to your student loan lender right away to see if you qualify for an adjustment.
You can often complete this step online by adjusting your annual income or applying for an IDR (income-driven repayment plan). There are a few different IDR plans set up to help low-income or financially burdened individuals better afford their student loan payments. These include:
- REPAYE (Revised Pay As You Earn) Payment Plan - available for direct loans only; this repayment plan typically sets your monthly payment amount at 10% of your monthly discretionary income.
- PAYE (Pay As You Earn) Payment Plan - follows the same terms as REPAYE, but is typically better for married borrowers when both spouses earn income; PAYE is harder to qualify for than REPAYE.
- IBR (Income-Based Repayment) Plan - available for direct loans and FEEL loans; this repayment plan typically sets your monthly payment amount at 15% of your monthly discretionary income (10% for new borrowers).
- ICR (Income-Contingent Repayment) Plan - available for most federal loans, including PLUS loans; this repayment plan typically sets your monthly payment at a fixed amount based on your income or 20% of your monthly discretionary income (whichever is less).
Enrolling in one of these programs now can help you determine how much money you’ll need to pay monthly, so you can start saving and making changes in your budget to prepare for repayment.
Finally, if you’re facing permanent disability, get in touch with your lender to find out if you qualify for permanent and total loan discharge.
If you don’t qualify for an IDR
Not everyone will meet IDR plan eligibility criteria. If you don’t, it’s typically because your income is too high to meet the qualifications. If this is the case, it’s important to begin reviewing your budget to determine how to afford repayment in the future. If you have high credit card, loan, or mortgage debt, working to pay down these balances to eliminate this debt or reduce your monthly payment in the future can help you reroute funds to your student loan payments in the fall.
You may also need to look at your expenses to figure out ways to lower them so you can afford your student loan payments. If you rent, consider looking for a more affordable home, moving in with family, or finding a roommate until you’re able to pay down your debt. Be sure to also look at your non-essential expenses to see if there’s anything you can reduce or eliminate.
If you have loans in default
For many Americans with federal student loans in default, the temporary freeze provided a much-needed financial respite. If you haven’t already been looking into minimizing this debt, now is the time to do so. Getting your loans out of default can help put your back on a more financially secure plan.
You can rehabilitate loans in default by talking to your lender. If you have a Direct or Family Education Loan, they’ll put you on a payment plan where you’ll need to make 9 on-time payments in a 10-month time period. This time period is shortened to 9 months for Federal Perkins Loans. These payments will typically be 15% of your discretionary income.
Loan consolidation is another way to get your student loans out of default. You’ll need to have at least one additional federal student loan in order to complete this process. It’s important to pay your defaulted loan on-time for three months in a row in order to qualify; you might still be approved without doing so, but you’ll need to repay the defaulted loan via an IDR if not. You can apply for a direct consolidation loan through the Federal Student Aid website.
Lastly, if you’re able to do so during the student loan repayment freeze, paying off your defaulted loan balance in full is the last way to get your loans out of default.
Here’s what you need to know if you’re working towards any of the student loan forgiveness programs
As of November 2020, there were over 3 million borrowers working towards Public Service Loan Forgiveness. This program allows individuals in public service professions, including teachers and qualifying government officials, to receive full forgiveness after making 120 on-time, full payments on their federal loans. In order to qualify borrowers must maintain a full-time job with a qualifying employer.
Since the federal student loan freeze halted the need for on-time payments, borrowers in this program were unsure whether or not they would need to keep making on-time payments to qualify for loan forgiveness. The good news is, while federal student loans are in temporary forbearance, those working towards loan forgiveness do not have to continue making payments to qualify. In fact, every month federal loans are frozen counts as a qualifying payment for individuals who maintain full-time employment in their qualifying fields.
Therefore, if you’re a second-grade teacher who is still employed full-time and is working towards teacher loan forgiveness, the past ten months of forbearance count as 10 qualifying payments. The next 8 months of forbearance will also count as 8 months' worth of payments, adding 18 total payments to your 120 quota, even if you stopped paying your loans during this time period.
Assistance for Private Student Loans
Lastly, you might be wondering what type of assistance exists for anyone with private student loans, which include any non-federal government-issued loan for secondary school or higher education expenses. While the federal government could not extend a freeze to loans they do not hold, there are options available if you’re facing private student loan payments and experiencing financial hardship.
The first step you should take is to reach out to your lender. While not all lenders are offering forbearance during the pandemic, many are willing to work with individuals experiencing financial trouble or who are completely out of work. Some lenders may put your loans into forbearance for a temporary amount of time or work with you to lower your monthly payments to a more affordable amount.
The worst thing you can do is simply not pay your private student loans, since they typically have high-interest rates that can quickly increase your debt and ruin your credit report. If your lender is not willing to put your loans into forbearance or lower your payment, it can be worthwhile to explore consolidating your loans.
Is it better to make payments on my loans while interest is low or pay down other debt?
Paying on your federal student loans while interest rates are at 0% can help you make a significant dent in your student loan debt and decrease the interest you’ll pay in your future. It will also help you pay off the remaining balance on your loans faster. However, if you have other debt with high-interest rates, it might be more beneficial to pay down this debt while you have some financial breathing room.
What should I do if I’m unemployed when my student loans become due?
Any time your financial situation changes, you should reach out to your student loan lender. They can work with you to temporarily freeze your payments or lower your monthly payment. If you’re currently unemployed, reach out to your lender now to see if you qualify for an IDR. This will set you up for better financial success when payments resume in the fall.
Is it worth paying student loans now if there’s a chance they’ll be forgiven in the future?
Student loan forgiveness is a hot topic in the news right now since Sen. Chuck Schumer and Sen. Elizabeth Warren reintroduced a $50,000 student loan forgiveness resolution. If this resolution were brought up for a vote in Congress and passed it would effectively provide student loan cancellation for millions of borrowers.
While it’s possible that legislation might pass and offer some form or forgiveness, I don’t recommend counting on this as a debt solution. If you’re not paying any loans right now, I recommend focusing on any loans that wouldn’t be included in a possible student loan forgiveness program (such as graduate, doctoral, and private loans).
Will student loan forbearance be extended again?
The temporary federal student loan forbearance period has been extended multiple times during the coronavirus pandemic. It’s too soon to say if there is likely to be another extension in the future. However, given Joe Biden’s commitment to providing financial relief to those hardest hit by the pandemic, if the economy does not rebound by the fall, it would not be surprising if we see another round of forbearance extensions.
That said, it’s important to prepare for repayment now, so you’re not surprised if your loans become due again in October 2021.
The bottom line
The latest federal student loan forbearance extension offers a longer period of financial relief for many Americans struggling to pay bills, make ends meet, and find employment. This temporary student loan freeze is an excellent time to focus on paying down debt or make a dent in your student loans if your finances have not been impacted. If you are suffering from financial hardship, now is the time to reach out to your lender to lower your payment based on your income or to begin budgeting for student loan payments so you’re prepared in the fall.
Be sure to make a plan now to cover these payments and consider consolidating your loans if you have a federal loan in default.