President Joe Biden and Education Secretary Miguel Cardona.
The Washington Post | The Washington Post | Getty Images
It’s been almost three years since people with federal student loans had to pay off their debt, and the Biden administration recently announced that borrowers have even more time.
In March 2020, when the coronavirus pandemic first hit the United States and crippled the economy, the U.S. Department of Education suspended federal student loan payments and the accrual of any interest, offering borrowers additional leeway during a particularly difficult financial period.
Taking over the bills of more than 40 million Americans has proven to be a huge and delicate task, and the suspension of payments now spans two presidencies and has been extended eight times.
Even before the public health crisis, when the US economy was going through one of the healthiest times in its history, problems plagued the federal student loan system, with around 25% – or more than 10 million borrowers – in default of payment.
Experts say hardship rates are only expected to rise with the setbacks of the pandemic, the current sharp rise in prices of daily consumer goods and the fact that borrowers have become accustomed to a budget without student loans.
Learn more about personal finance:
Credit card balances jump 15%
60% of Americans live paycheck to paycheck
These steps can help you deal with stressful credit card debt
White House officials had hoped to ease the transition to living with student loan repayments by writing off much of the debt first.
Yet shortly after President Joe Biden announced plans to forgive up to $20,000 in student loans for millions of Americans, a number of conservative groups and Republican-backed states attacked. politics in the courts. Two of those lawsuits succeeded in at least temporarily halting the relief, and the Department of Education closed its loan cancellation request portal this month.
With so much still up in the air, the Biden administration has once again pushed back the due date for student loan bills.
“It would be deeply unfair to ask borrowers to pay a debt that they would not have to pay, but for the baseless lawsuits brought by Republican officials and special interests,” Education Secretary Miguel Cardona said. , in a press release.
Here’s what borrowers need to know to get more time.
So when exactly will payments resume?
It’s a little complicated.
With previous extensions to the payment pause, the Department of Education has provided a date for the resumption of student loan bills.
This time, he left things a little more open, saying bills would not restart until 60 days after the dispute over his student loan forgiveness plan was resolved and he would be able to start clearing the debt.
Therefore, the earliest bills could be due again would be late January, if the legal challenges are resolved by the end of November, although that is unlikely.
If the Biden administration is still defending its policy in court by the end of June or if it is unable to move forward with student debt cancellation by then, she said, payments will resume at the end of August.
Borrowers therefore have at least two more months without bills and at most nine.
What if I’m behind on my student loans?
The U.S. government has extraordinary collection powers over federal debts and can garnish borrowers’ tax refunds, wages, and social security checks if they fall behind on their student loans.
During the long payment break, however, the Department of Education is also ceasing all collection activity, he said.
Borrowers in default on their student loans should also consider the recently announced “Fresh Start” initiative, in which they will have the option of reverting to current status.
Do I still have to wait for the refinancing?
Higher education expert Mark Kantrowitz previously recommended that, despite the possibility of a lower interest rate, federal student loan borrowers refrain from refinancing their debt with a private lender while the Biden administration was deliberating how to move forward with the pardon. Refinanced student loans would not qualify for federal relief.
Now that borrowers know how many loan cancellations will come — assuming the president’s policy survives in court — borrowers may want to consider the option now, Kantrowitz said. With the Federal Reserve expected to continue raising interest rates, he added, you’re more likely to get a lower rate from a lender now than later.
Still, Kantrowitz added, this is likely a small group of borrowers for whom refinancing makes sense.
He said those include borrowers who aren’t eligible for Biden’s discount — the plan excludes anyone who earns more than $125,000 as an individual or $250,000 as a family — and those who owe more on their student loans than the Biden administration plans to cancel. Those borrowers may want to consider refinancing the portion of their debt beyond the relief amounts, Kantrowitz said.
Betsy Mayotte, president of the Institute of Student Loan Counselors, warned borrowers to first understand the federal protections they are giving up before refinancing.
For example, the Ministry of Education allows you to defer your bills without interest if you can prove economic hardship. The government also offers loan cancellation programs for teachers and civil servants.
“Refinancing can generate a lower interest rate than federal student loans,” Mayotte said. “But your rate doesn’t matter if you lose your job, have sudden medical bills, can’t afford your payments, and find default is your only option.”
What should I do with the extra money during the break?
Boy_anupong | time | Getty Images
With headlines warning of a possible recession and layoffs on the rise, experts recommend that you try to squander the money you normally spend on student debt each month.
Some banks and online savings accounts have raised their interest rates, and it’s worth looking for the best deal available. You’ll just want to make sure that any account you put your savings into is FDIC insured, which means up to $250,000 of your deposit is protected against loss.
And while interest rates on federal student loans are at zero, now is also a good time to make progress on paying down more expensive debt, experts say. The average interest rate on credit cards is currently over 19%.
Would it make sense to keep paying my student loans?
If you have a healthy rainy day fund and no credit card debt, it may be a good idea to continue paying off your student loans even during the break.
With interest temporarily on hold, any payments will go directly to the principal of your debt, which could shorten your repayment time, said Anna Helhoski, student loan expert at NerdWallet.com.
“You can continue to make payments each month by contacting your servicer, or save money and make a lump sum payment on your loan at the highest interest rate before interest runs again when repayment restarts” , Helhoski said.
There is a big caveat here, however. If you’re enrolled in an income-driven repayment plan or want to get a government loan forgiveness, you don’t want to keep paying back your loans.
This is because months during the government’s payment break still count as eligible payments for these programs, and since they both result in forgiveness after a certain period of time, any money you throw at your loans during this time only reduces the amount you will end up getting. excuse.
Another possibility: If you find yourself in a comfortable financial situation and it doesn’t make sense for you to continue paying off your student loans, you may want to donate the extra money.
You can make sure an organization is reputable by using tools like the Better Business Bureau’s Wise Giving Alliance or Charity Navigator, Helhoski said. If the charity is registered as 501(c)(3), you will even be entitled to tax relief.