Extended student loan interest freeze – but prepare for repayment now

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The current federal student loan freeze – a lifeline suspending interest-free repayments for millions of borrowers in the wake of the pandemic – will now last at least until January 31, 2022.

The federal loan freeze was first enacted in 2020 and has been extended several times, but the Education Department has called the current deadline “final extension ”for this relief.

Since the interest-free repayment break is not expected to continue beyond January, you will need to prepare to collect your payments. Particularly if you have a delinquent loan, you should try to restore your repayment while you are free from collections and any further damage to your credit report.

To be ready, let’s try to answer these two questions:

How long are student loans interest free?

The the federal loan repayment pause, enacted on March 27, 2020, via the CARES (Coronavirus Aid, Relief and Economic Security) law, was only to last until September 30, 2020. However, the resurgence of the COVID-19 crisis and its effect on the economy prompted several White House orders across two administrations to extend the relief program.

As mentioned, the relief is now due to expire on January 31.

“The payment break has been a lifeline that has allowed millions of Americans to focus on their families, health and finances instead of student loans during the national emergency,” the US secretary told Education, Miguel Cardona, in a statement announcing this “final extension”.

Note that the relief is limited to student loans on the federal government’s balance sheet. Federal Private Family Education Loans (FFELs), Perkins loans from schools, and alternative loans from banks and other entities were excluded.

How the Extension of Student Loan Relief Became …

2020
  • July 30: President Trump said in his press briefing: “We have also suspended student loan payments for six months, and we are looking to do so in addition and for additional periods. “
  • August 8: Trump has officially ordered the Department of Education to extend to December 31, 2020 by executive order.
  • December 4: After hinting at the possibility ahead of the November election, Trump asked Education Secretary Betsy DeVos to extend the interest freeze until Jan.31, 2021.
2021
  • January 20: Biden officially extended the freeze via one of more than a dozen executive orders on the first day of his presidency.
  • August 6: The Ministry of Education announces a final extension until January 31, 2022


Under the current freeze, “non-payments” by eligible borrowers still count towards remission requirements under Income-Based Repayment Plans (IDRs) and Income Repayment Plans.
Public Service Loan Discount (PSLF) as well as under loan rehabilitation agreements.

He also clarified that defaulting federal loan borrowers will not have their wages garnished as long as the interest freeze remains in place.

As noted, the action limits temporary student loan relief on the federal government’s balance sheet. Federal Private Family Education Loans (FFELs), school-based Perkins loans, and alternative loans from banks and other entities are excluded.

Fortunately, however, loans not covered by government assistance could be taken over by state governments and private lenders.

Here are some ways to prepare for your student loan repayment return.

7 steps to prepare for the end of the reimbursement suspension

Staying on top of the news is the first step in preparing for your federal loan repayment resumption, whenever it occurs. Watching the screen, however, will leave you just waiting, hoping for good news.

To be more proactive and prepared for the bad news, consider these seven steps:

  1. Replenish your emergency fund
  2. Rehabilitate defaulted loans
  3. Adjust your repayment plan
  4. Examine options for adjournment and forbearance
  5. Explore non-federal government support
  6. Touch the base with your loan manager
  7. Keep student loan refinancing on your radar

1. Replenish your emergency fund, if you can.

If you are wondering whether to save money or pay off debt, the answer is clear, but only until the end of January. While the penalty-free repayment break remains in effect, replenishing your fund for rainy days should be a priority. This way, you will have a cushion in case you need to dip into the fund to pay off student loan repayments later.

As a rule of thumb, it’s wise to keep three to six months of spending in your accessible savings account. With the future of the unemployment rate uncertain, however, the more you save, the better off you’ll be.

2. Rehabilitate overdue loans before recovery resumes

The CARES Act promised an additional stay for defaulting federal student loan borrowers: a halt to collections and garnishments of wages and other monetary benefits. The Education Department also said it would reimburse $ 1.8 million from recent foreclosures. (If you haven’t been healed, find out how that the borrower has recovered their tax refund.)

To avoid such penalties in the future, develop a strategy how to get your loans out of default. Your options for debts held by the federal government include:

What there is to know Advantages and disadvantages
Rehabilitation
  • Make nine payments within 10 months, with a payout amount equal to 15% of your discretionary income
  • The monthly payment amount could be as low as $ 5, depending on your income
  • Collections can continue until you have made all nine payments
  • Removes your default record from your credit history, possibly increasing your credit score
  • Rehabilitation is a unique opportunity
Consolidation of direct loans
  • Consolidate one or more federal loans into a new loan. You can agree to repay it on a income based repayment plan, or make three consecutive payments in a timely manner before consolidation occurs
  • Consolidation not possible until wage garnishment is lifted
  • Will not immediately remove the default from your credit report
Payment in full
  • If you have the money to do it, put your balance to zero
  • Not practical for most borrowers

3. Adjust your repayment plan or monthly contributions, if necessary.

Joining an income-based repayment plan (IDR) could make your payments more affordable when they resume. IDR plans limit your monthly contributions to 10% to 20% of your discretionary income. They also take into account the size of your family.

And you don’t have to wait until January to register. In fact, you can revisit your IDR options at any time – the loan simulation tool could help you decide. After choosing the best reimbursement option for your situation, you can request it in 10 minutes at no cost.

If you are already paying off your debt through an IDR but see a decrease in household income (or an increase in family size), you can recalculate your monthly contributions via Studentaid.gov.

4. Examine the other options to suspend the refund.

Special administrative forbearance from the federal government isn’t the only way to pause your refund. There are all kinds of deferment and forbearance options, including:

Duration Eligibility
Postponement of unemployment Up to three years If you are out of work
Postponement of economic hardship Up to three years If you collect social benefits, earn a particularly low income, or serve in the Peace Corps
General tolerance Up to 12 months at a time for up to three years Granted at the discretion of your loan manager, based on your financial hardship, medical expenses, employment, or other factors
Student loan debt abstention Up to 12 months at a time for up to three years If your monthly federal loan contributions are greater than 20% of your gross income

Unlike the special administrative forbearance granted to most federal loan borrowers in March, the above options…

  • … must be requested and are never automatically granted
  • … Earn and capitalize interest in most cases, except on subsidized loans and Perkins loans during a deferral
  • … Can be reported to credit bureaus and possibly affect your credit score

5. Explore non-federal forms of loan relief

When the federal loan suspension ends, other support options will still exist.

So if IDR and interest deferrals like deferral and forbearance aren’t enough – or you also have private student loans to manage – consider the following:

6. Maintain communication with your loan manager

If you can’t remember the last time you checked your debt repayment options, track down your federal loan manager and ask for help when you need it.

While you’re at it …
Make sure your repairer has your up-to-date contact details. Federal loan management contracts set to expire by the end of 2021 – and a host of new loan services are coming on board – your debt could be transferred.

This advice also applies to private student loan relief. It never hurts to ask your bank, credit union, or online lender for help.

A Student Loan Hero survey in June 2020 found that 70% of private loan borrowers who sought help from a lender were successful in obtaining it. Whether you are offered modified repayment terms or a lower monthly payment, you might be surprised by the generosity of a lender.

7. Consider refinancing a student loan, but don’t apply right away

While the federal government takes care of the interest on your student loan (at least for now), it makes little sense to refinance your student loan debt at a lower interest rate. No bank can beat Uncle Sam’s current 0% offer.

However, the interest rate freeze does not last forever. When your rates return to their normal levels, it might be a good idea to refinance federal loans. After all, private lenders are also offering very low interest rates in this economic environment hit by the coronavirus.

Just make sure you don’t miss federal loan protections – like access to IDR, deferral and forbearance, and forgiveness programs – before you make the irreversible decision to refinance.

For any other concerns about your student debt, visit our Coronavirus Information Center.


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