The federally-owned student loan payments have been temporarily halted, but not forever.
The coronavirus pandemic in the United States has claimed the lives of hundreds of thousands, sickened millions more, and caused the worst economic crisis since 2008 if it wasn’t the Great Depression. However, bills have become much less burdensome for many Americans, particularly student borrowers.
The federally-owned student loan borrowers have not had to pay interest nor principal since March 2017 thanks to the Trump administration’s first moratorium, which was extended by the Biden administration up to September 30, 2013.
According to the latest Federal Reserve data, the average U.S. student loan payment is between $200-$299 per month. The moratorium provided relief for millions of people who had difficulty paying their loans before the pandemic. It also increased the spending power and purchasing power of those who could afford them.
However, these bills will eventually become due. Here are some ways to plan for the future.
Although you have Federal Loans, You Still Have Income
There are options for those who have been able to pay their student loans before the moratorium and have not seen their income drop.
This could be a way to redirect the student loan money to other savings, which can be used to pay off student debts.
Bruce McClary is a senior vice president of the National Foundation for Credit Counseling. He stated that many college graduates don’t have much wealth and have not saved for retirement or for emergencies.
In some cases, it makes sense to continue making loan payments. You have the rare opportunity to pay down your principal loan while the interest rate is at zero.
Beyond the immediate financial costs of student loan repayments, research shows that having debt hanging over your head makes it more difficult. However, getting rid of it can have many benefits.
A study showed that borrowers who had their debts canceled by a judge due to a procedural violation were more likely than others to move homes or jobs. The income of the borrowers also increased by $3,000 over three years.
Alexis Goldstein, a senior policy analyst at Americans for Financial Reform, stated that “just the clearing out of those debts had such a monumental effect on people’s lives.”
Persis Yu, director of the Student Loan Borrower Assistance Project, National Consumer Law Center, stated that “student loan debt borrowers are less likely to own homes, start families, or start businesses.” “This could be an opportunity to address some of these problems or highlight the ways that people can live better lives if they don’t have student loans, even if they are financially stable.”
If you are expecting your student loans to be forgiven in the future, then aggressively paying off student loan debt will not make sense. This would be applicable to those who are enrolled in the Public Service loan forgiveness program. This may be a good opportunity to enroll in the Income-Driven Payment program. It allows borrowers to reduce their loan payments according to their income. However, this might not be an option for high-income borrowers, who may prefer to pay down their debt immediately.
Privately held Federal Loans
Only federal student loans are exempted from the moratorium on student loans. However, federal student loans not owned by the federal government are exempted from this moratorium. These loans are also known as Federal Family Education Loans (FFEL).
“If you’re a young student borrower, you’re more likely to be covered,” Goldstein said, pointing to 2010 laws that changed the federal student loan system, allowing the government to guarantee certain loans and making them themselves. It’s less likely that your loan will be a direct loan if you are older.
Yu says that this doesn’t necessarily mean aid is out of reach for borrowers who don’t have loans covered by the current moratorium. They could consolidate their FFEL loan to be eligible for the moratorium as well as other benefits. However, this may not be the best option for all borrowers. In some cases, it could lead to an interest rate penalty or loss of benefits related to a loan program.
Borrowers who don’t make a lot of money may be eligible for Income-Driven Repayment. You get credit for enrolling in the program, and you can apply for forgiveness, even if your loan payments are not due.
It’s impossible to make payments right now
Nearly 11% of student loans were in default at the start of 2020. Many other borrowers were already struggling to make their payments.
McClary, National Foundation for Credit Counseling, stated that “for people who are struggling and suffering financially this [moratorium] can be a significant lifeline. It shouldn’t go waste.”
The moratorium has not only stopped mandatory payments but also collections. This means that wages and tax refunds cannot be garnished to forcibly repay loans.
Although federal loan payments are unlikely to pile up, rent payments could, even with the national eviction moratorium. This means that rent payments should be the priority over getting advanced on student loans if you are unable to pay them both.
McClary says that the best way to get the most out of the student loan moratorium is to make sure you are taking advantage of any other temporary assistance programs available to people in need. These include increased state unemployment benefits, stimulus checks, and moratoria cutting off utilities if non-payment.
You’ve Already Defaulted
You have the option of rehabilitation for students who were in default on student loans prior to a moratorium being put in place. This is an Education Department program that helps you get current on a loan that was not paid.
You must make nine payments within a period of 10 months to rehabilitate your loan. You can still get credit for those nine payments if you enroll in a loan rehabilitation program prior to the student loan moratorium expiring.
Be careful. Rehabilitation is not always the best option.
You stated that “re-defaulting is worse than defaulting at all.” A borrower can’t default a second or further.
October is not to be forgotten
Although few student borrowers will need to be reminded, any changes that you make, whether it’s increased savings, changing spending habits, or a combination of both, should be available to you to switch them back by October 1.
McClary stated, “It might slip your mind and it may become comfortable with our new budget or new priorities.” Use whatever calendar you prefer, Outlook, Google, or any other. You can set up reminders to let you know when the student loan payment reprieve is about to end.