How to prepare for the end of federal student loan relief


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For people waiting to know President Joe Biden’s plans for student debt, his first speech before a joint session of Congress was a letdown. While he talked about free community college for two years, increasing Pell Grants, and investing in historically Black colleges and universities, tribal colleges and minority-serving institutions, he did not mention forgiving student loans, an idea he supported on the campaign trail.

What the omission portends—only time will tell. In the meantime, borrowers may be counting the months till September, when the payment and 0% interest holiday they’ve been enjoying since the passage of the CARES Act is set to expire.

Thanks to the CARES Act and subsequent executive orders, student loan payments have been suspended and interest rates set at 0% — plus there has been a moratorium on collections and wage garnishment for borrowers who had defaulted on some types of federally held student loans. The relief was originally set to end on Sept. 30, 2020, but was extended first to the end of last year, then to Jan. 31, 2021, and finally by President Biden to Sept. 30, 2021.

As a candidate, Biden ran on a platform that included student loan reform, but the majority of his proposed actions would require congressional approval—a process that can take months or even years after an act is introduced to process and pass. 

More recently, the president asked the Department of Education to study whether he could cancel student debt by executive order.

Until President Biden announces his plans for student debt, advocates will continue to press for action and pundits will debate the issue. During these weeks of uncertainty, borrowers can prepare for whatever circumstance may arise.

Related: Do
student loans count as income?

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Keep Up With the News

There’s been a lot of talk about the future of student debt. But it’s important to assess what action is being taken on the executive level in regard to federally held student loan payment suspension and other COVID-19 relief strategies.

(To be clear, the forbearance applied to defaulted and nondefaulted Direct loans, defaulted and nondefaulted FFEL Program loans, defaulted and nondefaulted Federal Perkins Loans, and defaulted HEAL loans—if those loans are owned by the Department of Education.)

One of President Biden’s first steps after taking office was to extend the payment pause and 0% interest for federally held student loans till Sept. 30. Since then, he has signed a $1.9 trillion COVID relief bill and introduced a $2.3 infrastructure package and $1.8 trillion American Families Plan. 

He has said his proposals are up for negotiation, but neither provides for student debt cancellation. That said, as noted earlier, he is looking into whether he has the executive authority to forgive student loans.

Paying attention to breaking news about federal student loan can help you assess next steps and make a plan.

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Read Incoming Communications

If there are no new student loan relief measures, borrowers will start to receive notices from their federal student loan servicers as September approaches. It’d be a good idea to read them, as they will contain information about the date that loan payments will resume and provide information on the federal government’s loan repayment plans.

Loan servicers may try to reach you by phone, mail, or email, so make sure you have updated information on file, especially if you moved or are not regularly at your mailing address.

Borrowers may notice that their loan payoff period is longer. That’s because the forbearance period was a break, but no part of the loan is forgiven. The loan is still expected to be paid in full.

There is, however, an exception for borrowers on income-driven repayment plans. The suspension will be credited toward their loan payments.

Borrowers who are part of the Public Service Loan Forgiveness plan may also receive credit for the suspended payments if they fulfill certain qualifications, including having a federal Direct loan, being on a qualified payment plan before the forbearance period, and working a minimum 30-hour week.

Those who were laid off or furloughed may not qualify. These specifics can make it tough to know how much you’re expected to pay, so if you have questions, contact your loan servicer before payments restart.

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Assess Your Options

Many people are in very different circumstances from when the payment moratorium first took effect. Borrowers may need to take a look at their budget and assess how their federal student loan payments fit into their current financial picture.

Some may have no problem resuming payments. Others may want to consider refinancing or consolidation. With payments on pause, it can be a good time to explore options.

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Consider Restarting Automatic Payments Early

Some borrowers in a position to resume student loan payments have already done so, or continued to make monthly payments even though it was not required. This move allowed them to take advantage of 0% interest and likely paid down the principal on their student loan.

As September looms, it may make sense to assess your budget and see what it would look like if you have to resume federal student loan payments.

Borrowers who decide to resume payments can contact their loan servicer to restart automatic payments. It may also be a good idea to ensure that any payments made during the relief period are going to the principal of the loan. You can clarify this with your servicer.

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Consider an Income-Driven Repayment Plan

There are four income-driven repayment plans. Most federal student loans are eligible for at least one:

  • Pay As You Earn (PAYE)
  • Revised Pay As You Earn (REPAYE)
  • Income-Based Repayment Plan
  • Income-Contingent Repayment Plan

Eligibility depends on your type of loan and your circumstances, but the commonality for all is that your payment is set at an amount that is “affordable based on your income and family size.” If you qualify, you’ll pay a certain amount of your discretionary income over a set period of time. After that period is over, the loan may be forgiven.

For example, under REPAYE, you’ll typically pay 10% of your discretionary income for 20 years (25 if the loans were graduate school or professional study loans). It may take less than 20 years to pay off your loans, especially if your income rises.

For any income-driven repayment plan, periods of deferment due to economic hardship (such as a job loss) will count toward your repayment period, so you would not be paying loans beyond the set amount of time set by the repayment plan.

Federal income-based payment programs require you to recertify your income every year, and your repayment changes based on income and family size.

Some borrowers find that the unknown is tough to navigate and prefer setting autopayments that do not change unless the loan is refinanced, consolidated, or put into deferment.

Another consideration of income-driven repayment plans is that, as of now, any amount forgiven after the repayment period is considered taxable income.

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Apply for Additional Relief

The CARES Act and subsequent executive action recognized that COVID created economic uncertainty on a national scale. But there are other options available for deferral or forbearance if a federal student loan borrower is struggling with finances.

Forbearance and deferral pause payments, but they may differ in interest accrual rules. Qualifications for either depend on your type of loan and reason for requesting forbearance or deferral.

Under forbearance, interest will usually accrue during the period, which will increase a borrower’s balance and lead them to pay more over the life of the loan. During deferment of a federal student loan, interest does not typically accrue.

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Consider Consolidating Loans

Consolidation allows borrowers with more than one federal student loan to combine them into one loan with a fixed interest rate that is the average of the rates of the loans being consolidated (rounded up to the nearest one-eighth of a percentage point).

Borrowers may see a change in monthly payments when they consolidate their loans into a Direct Consolidation Loan, but one of the biggest benefits is convenience. Instead of multiple loans to track each month and multiple payments, there is one payment a month, at a fixed interest rate.

The length of the loan term also may change, so it’s important for borrowers to consider the length and interest paid over time, as well as the monthly payment, to assess whether the consolidation makes sense for their financial goals.

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Then There’s Refinancing

Interest rates on many lending products offered by private lenders are at near-historic lows, thanks to the Federal Reserve’s near zero interest rate. On April 29, the Fed announced that it will maintain interest rates at 0.10%.

Deciding to refinance federal student loans depends on a number of factors. One thing that is important to note is that refinancing federally held student loans with a private lender means the loans are no longer federal loans and as such, are no longer subject to federal benefits like income-driven repayment plans, Public Service Loan Forgiveness, or federal forbearance.

If you refinance your student loans, a new, private loan will pay off the federal student loans, meaning you will have a new lender. Refinancing can be a good choice for working graduates who have high-interest Direct Unsubsidized Loans, Graduate PLUS loans and/or private loans. Again, those who refinance will have the ease of one loan and one monthly payment.

It’s important to read the fine print and compare offers among lenders. Some companies provide benefits that may ease concerns about the future. 

It’s also important to understand interest rates, and how a variable rate could affect payments if interest rates were to rise. Different lenders also may have fees.

Comparing options, plugging in numbers, and weighing different scenarios based on your current financial picture and your goals may be helpful in assessing whether refinancing is an option for you.

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The Takeaway

While there may be a lot up in the air, existing student loans aren’t likely to disappear any time soon.

Understanding the repayment options available can help borrowers make a plan to handle their debt when federal student loan relief ends.

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