Student Loan Payment Pause: What You Need to Know

Student loan relief continues to be a hot topic, primarily because the government has extended the pause on student loan payments several times. If you've been avoiding your student loan account since early 2020, now is the time to prepare your budget for when payments resume.

The Latest Extension

The most recent news is that student loan relief has been extended through no later than June 30, 2023. Payments have been paused for nearly three years, and this is the eighth time the pause has been extended. This extension revolves around the fate of President Biden’s student loan debt relief plan.

Initially, President Biden anticipated that his student loan forgiveness plan would be approved by January 2023. However, court orders have blocked student loan debt relief, casting uncertainty on the plan's future. The situation could resolve in several ways: either student loan forgiveness will be approved or it will be completely rejected, potentially by the Supreme Court. Federal student loan payments will restart 60 days after a decision is made.

Essentially, federal student loan payments and interest are currently paused.

The CARES Act and Subsequent Extensions

The government initially passed the CARES Act, which paused monthly payments and stopped interest from accruing on student loans. This was in response to the economic hardship faced by people who had lost their jobs or were furloughed. The government postponed student loan payments and interest to ease the burden on these individuals.

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The latest extension potentially pushes the resumption of payments another six months, marking the longest extension to date.

Preparing for the End of Student Loan Relief

Regardless of what happens with Biden’s student loan debt relief plan, preparing for the eventual resumption of payments is crucial.

Saving as a Precaution

Even if you're unsure about the forgiveness plan, consider saving the potential forgiveness amount ($10,000 or $20,000). If the plan falls through, you can use the savings to pay off your student loans. If the loans are forgiven, you can put the money into savings or use it to pay off other debts.

Prioritizing Payoff

Don’t rely on future forgiveness. Paying off your student loans as quickly as possible saves time and reduces stress.

Restarting Payments Now

Consider making payments now, even though they are not required. Currently, payments go directly toward the principal amount without accruing interest. Taking advantage of this zero-interest period reduces the total amount you’ll pay.

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Addressing Potential Payment Strain

Acknowledge that financial situations may have changed due to events like inflation. If the usual payment feels heavier, explore strategies like the debt snowball method.

The Debt Snowball Method

With the debt snowball, you pay off debts from smallest to largest. Once a debt is paid off, the amount you were paying on it is added to the payment on the next debt. If your student loan is the only debt you have (excluding a mortgage), focus on eliminating it as quickly as possible.

Verifying Loan Servicer Information

Ensure your loan servicer has your correct information, including your name and address. Also, confirm who is servicing your loan, as it may have changed.

Avoiding Misguided Advice

Be cautious of advice suggesting forbearance and income-based repayment as solutions. While they may seem helpful, they can prolong debt and accrue interest once student loan relief ends.

Fresh Start Initiative

Borrowers with federal student loans in default have a "fresh start" initiative, allowing them to re-enter the repayment process in good standing.

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Income-Based Repayment Plans

While income-based repayment plans may offer lower monthly payments, they often extend the loan term, resulting in paying more over time.

Taking Control

Relying on the government to solve your problems is not always the best approach. Instead, take control of your student loans by taking proactive steps.

Credit Union Guidance

Credit unions should assess their exposure to borrowers with federal student loans and contact those facing potentially large repayments to inform them about loan modification options. Monitoring credit card and line of credit usage after payments restart can help identify borrowers experiencing financial stress. Prudent underwriting and loss mitigation strategies should be applied for borrowers experiencing financial difficulty.

Additional Information and Resources

Updated Information: Payments and interest on federally-held student loans are set to resume 60 days after a court decision on President Biden’s forgiveness program, or 60 days after June 30th, 2023, if no decision has been issued.
Automatic Application of Extension: The extension is applied automatically.
Income-Driven Repayment (IDR): Consider enrolling in Income-Driven Repayment (IDR) to lower monthly payments.
Public Service Loan Forgiveness (PSLF): These months count toward forgiveness programs like PSLF. Complete all necessary steps by the deadline to ensure past payments count.
Loan Servicer Changes: Borrowers with loans at FedLoan Servicing, Granite State, and Navient may have a new loan servicer.
Student Loan Scams: Be aware of student loan scams.
New Income-Driven Repayment (IDR) Plan: A new IDR plan will lower payments for undergraduate loans, setting payments at 5% of discretionary income.
Coverage of the Pause: The pause covers tens of millions of borrowers with eligible federal student loans.
Suspension of Payments: All payments will be suspended on covered federal student loans.
Credit Towards Loan Forgiveness: Borrowers will continue to receive credit towards loan forgiveness programs like PSLF and IDR.
Interest Rate Reduction: Interest rates on eligible federal loans will be reduced to zero percent, backdated to March 13, 2020.
Pause on Collection Activities: Collection activities on covered loans will be paused.
Consumer Financial Protection Bureau: The Consumer Financial Protection Bureau has a portal for submitting complaints about student loan payments.
Department of Education’s COVID-19 Relief: The Department of Education’s COVID-19 relief for federal student loans is ending. Federal student loan interest resumed on September 1, 2023, and payments restart in October 2023. The Department of Education is providing a 12-month on-ramp to repayment, starting on October 1, 2023, and ending on September 30, 2024.

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