Student loans are on hold – should you still pay?
(NerdWallet) – Payments are currently suspended, without interest, for most federal borrowers until August 31, 2022. This policy does not apply to private student loans.
Borrowers can still make payments to reduce their debt during this period of suspension of payments, called forbearance. According to the latest federal data, a total of 500,000 borrowers (about 1.16% of all 42.9 million federal borrowers) continued to make payments during the pause. Contact your repairer if you have any further questions.
” MORE: Can student borrowers also manage payments and inflation?
Don’t get me wrong: this is a pause in payments, not a pardon. Your debt will be waiting for you when repayment begins at the end of the forbearance, unless the policy changes again. While the Biden administration has said it plans to push for an accelerated $10,000 forgiveness for all federal borrowers, few observers think such a bill could pass Congress quickly.
In the meantime, here’s how to decide what to do next.
If you want to suspend payments
You don’t have to do anything to get a forbearance to stop student loan repayments. Interest will not continue to accrue as it normally would.
Abstaining could give you leeway to address other financial concerns.
If you’re unemployed or working reduced hours, abstaining can free up money to pay rent and utility or grocery bills. Even if your salary isn’t affected, forbearance could help divert money toward building up an emergency fund or help you pay off another, more pressing debt.
Usually, forbearance is granted at the discretion of the administrator and interest will continue to grow. In this case, the Department of Education has instructed all administrators to automatically place all loans in interest-free forbearance.
If you’re behind on your student loan payments (or late)
Federal loans with overdue payments or defaulted loans will return to “good standing” status when payments resume on September 1, 2022.
Default on federal loans occurs when a payment is 270 days past due, sending your loan into collections and exposing you to damaged credit, garnished wages, and garnished tax refunds.
All collection activities are suspended until August 31, 2022. You can get a refund for any forced student loan payments made since March 13, 2020. If your tax refund was garnished before March 13, 2020, it will not will not be returned.
If your loans were already in forfeiture, any interest already accrued will still be added to your loan principal when your repayment begins, but while in the forfeiture in progress, no new interest will be calculated.
If you are applying for a civil service loan forgiveness
Automatic forbearance will not reverse your progress towards Public Service Loan Forgiveness, or PSLF. As long as you are still working with an eligible employer, the months spent in abstention will count towards the PSLF.
Making payments during automatic forbearance will not advance you on payments. You are in the same boat whether you pay or not.
Under normal circumstances, only full payments count. You also won’t lose credit for payments you’ve already made.
If you want to continue making payments
Borrowers might want to keep making payments on federal loans if they want to pay off their debt faster.
If you continue to make payments, you will not pay any new interest on your loans while forbearing. This 0% interest rate will save you money overall, even if your payment won’t be lower.
The full amount of your payment will be applied to the principal balance of your loan once all interest accrued before March 13 has been paid.
Whether or not to make a payment during this time will depend on your initial repayment strategy:
- Those who stick to a standard repayment term (usually 10 years) might consider making payments. You probably won’t have a lot of unpaid interest, and extra payments can help reduce your principal during the break. To maintain your flexibility, we suggest you open a savings account and collect these monthly payments, then make a lump sum payment on your loan at the highest interest rate when repayment begins.
- Borrowers enrolled in, or planning to, income-contingent repayment shouldn’t worry about making payments now if the ultimate plan is to pay until the loans are forgiven – typically 20 or 25 years. If you want to pay off your loans sooner, paying now could help reduce the total interest you owe on top of your principal.
- Borrowers applying for public service loan forgiveness do not need to make any payments until at least September 1, 2022. The months of automatic forbearance will count towards the 120 payments needed for forgiveness.
Contact your loan servicer with any questions about continuing or restarting payments during the forbearance period.
If your income has changed
If you see a change in income and still want to maintain your payments, the best way to reduce your payment to something more affordable is to request an income-contingent refund. You will receive a new payment based on your family size and a percentage of Discretionary Income, and it will be in effect even after the relief expires. You can apply online at studentaid.gov.
If you are already enrolled in an income-based plan, be sure to update your income if it has changed due to the economic downturn.
If you needed to recertify your plan before August 31, 2022, you will now have additional time to do so. IDR recertification dates have been extended until at least March 2023. Borrowers will be notified when it is time to recertify. Temporarily, borrowers with direct loans can self-declare their income when applying for or recertifying an IDR plan. This means that you do not have to submit tax documentation, but you will need to select “I will report my own income information” in Step 2 (Income Information) of the IDR application. This option ends on February 28, 2023.
If you have FFEL loans
If you have Federal Family Education Loans (FFEL), you are eligible to receive interest-free forbearance only if the government owns the loans. It won’t be most FFEL borrowers – most of the loans in the now defunct program are held by businesses.
You can find out who your loans belong to by logging into studentaid.gov using your FSA ID.
The only way to gain forbearance for FFEL loans held for business purposes is to consolidate your debt into a new direct loan. But there are downsides to consolidation:
- Your repayment term will be extended.
- Your interest rate will increase slightly.
- Any unpaid interest will be capitalized and added to the total amount you owe.
Interest-free temporary payments may not be worth these extra costs in the long run.
Also, if you are already making payments on an Income Based Repayment (IBR) plan, those previous payments will no longer count towards the rebate. You will have to start all over again.
Consolidation may make sense if you have FFEL loans and want to qualify for civil service loan forgiveness. Otherwise, stay with your current loans.
If you have experienced a change in income, you can enroll in the IBR or recertify earlier, if you are already on this plan. The IBR will always take your spouse’s income into account. Your loans are also eligible for unemployment deferment, which can be helpful if you’ve lost your job but expect to start working again soon.
How to work with your repairer
If you want to restart payments during automatic forbearance, contact your student loan officer – this is the private company that handles your federal loan payments. But you don’t have to do anything to get the forbearance or the 0% interest rate.
To find out which loan officer is yours, log in to studentaid.gov with your FSA ID.
You can get in touch with all loan officer contact centers by calling 1-800-4-FED-AID.
For more information, visit studentaid.gov/coronavirus for details to come.