Student Loan Relief Extended — But Here’s Why You Should Prepare for Repayment Now

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President Donald Trump signed an executive order Saturday extending the current pause on federal student loan payments through Dec. 31, 2020, throwing a lifeline to millions of borrowers. But that said, the suspension will end eventually, so it’s worth preparing now for that new beginning.

So while the payment freeze and 0% interest period are now extended through the end of the year, it’s worth being proactive. Particularly, if you have a loan in default, you will want to rehabilitate your repayment while you’re free from collections and additional harm to your credit report.

By acting now, you’ll be best equipped to handle the resumption of loan payments, whenever it occurs. Let’s take a look at how long the suspension is likely to last and 7 steps you can take to prepare for the resumption of repayments.

How long will the new repayment suspension last?

The federal loan repayment freeze, signed into law March 27 via the CARES Act, was only supposed to last through Sept. 30. However, the resurgence of the coronavirus crisis — and its effect on the economy — has prompted the new White House order to extend the freeze.

With a stroke of the president’s pen Saturday, all federally-held student loans were set to enjoy deferred payments and no interest through the end of 2020. Borrowers can also elect to keep making monthly payments, which is a potential strategy to shorten your repayment term.

How the Trump administration’s executive order came to be …
Senate Republicans had stopped short of prolonging the repayment suspension, with Sen. Lamar Alexander (R-Tenn.) instead pitching a more streamlined menu of repayment plans. House Democrats, for their part, passed the HEROES Act in May, which would have stretched the program by 12 months (and would have included federal and private loan borrowers excluded from the repayment freeze initially). Without an agreement in place, however, the White House moved ahead.
  • July 30: President Trump said during his press briefing: “We also suspended student loan payments for six months, and we’re looking to do that additionally and for additional periods of time.”
  • Aug. 6: Trump tweeted that he was calling on his staff to “continue working on an executive order with respect to … student loan repayment options.”
  • Aug. 7: Trump announced his intention to bypass Congress and extend the loan repayment freeze “until further notice” (among other actions) at a press conference.
  • Aug. 8: Trump formally directed the education department to carry out the extension with the executive order.

The action limits temporary relief to student loans on the federal government’s balance sheet. As before, privately-owned Federal Family Education Loans, school-sourced Perkins loans and alternative loans lent by banks and other entities are excluded. Fortunately, loans not covered by government relief could be supported by state governments and private lenders.

It wasn’t immediately clear, however, whether borrowers pursuing Public Service Loan Forgiveness and other federal loan cancellation programs could include the suspended payments in their applications for relief. The Trump administration’s memo to the Department of Education also didn’t stipulate whether it should continue waiving the garnishment of wages and federal benefits for federal loan borrowers mired in default.

With an executive order in hand, however, the Department of Education could clarify the details of the repayment extension with an announcement likely later this week.

7 steps to prepare for the end of the repayment suspension

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

To be more proactive — and prepared for not-so-good news — consider these seven steps …

  1. Replenish your emergency fund
  2. Rehabilitate any loans in default
  3. Adjust your repayment plan
  4. Review deferment and forbearance options
  5. Explore non-federal government support
  6. Touch base with your loan servicer
  7. Keep student loan refinancing on your radar

1. Replenish your emergency fund, if you can

If you’re wondering whether to save money or pay off debt, the answer is clear, but only through December. While the penalty-free repayment break remains in effect, refilling your rainy day fund should be a priority. This way, you’ll have a cushion in case you need to dip back into the fund to afford student loan payments down the road.

Generally, it’s wise to carry three to six months’ worth of expenses in your accessible savings account. With the future of the unemployment rate uncertain, however, the more savings you sock away, the better off you’ll be.

2. Rehabilitate any loans in default to before collections resume

The CARES Act promised an additional reprieve for federal student loan borrowers in default: a halt to collections and garnishments of wages and other monetary benefits. The Department of Education has also said it would refund $1.8 million worth of recent seizures. (If you haven’t been made whole, learn about how this borrower retrieved her tax refund.)

To avoid such penalties in the future, strategize how to get your loans out of default. Your options for federally-owned debt includes:

What to knowPros and cons
Rehabilitation
  • Make nine payments within 10 months, with the payment amount equal to 15% of your discretionary income
  • Monthly payment amount could be as low as $5, depending on your income
  • Collections could continue until you’ve made all nine payments
  • Removes the record of your default from your credit history, likely boosting your credit score
  • Rehabilitation is a one-time opportunity
Direct loan consolidation
  • Consolidate one or more federal loans into a new loan. You can agree to repay it on an income-driven repayment plan, or else make three straight, timely payments before consolidation occurs
  • Consolidation not possible until wage garnishment is lifted
  • Won’t immediately remove the default from your credit report
Payment in full
  • If you have the cash to do it, zero out your balance
  • Not practical for most borrowers

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

Enrolling in an income-driven repayment (IDR) plan could make your payments more affordable when they resume. IDR plans limit your monthly dues to 10% to 20% of your discretionary income. They also account for your family size.

And you don’t have to wait until January 2021 to enroll. In fact, you can review your IDR options at any time — the government’s loan simulator tool could help you decide. After choosing the best repayment option for your situation, you can apply in 10 minutes, free of charge.

If you’re already repaying your debt via an IDR but have seen a decrease in household earnings (or an increase in family size), you could recalculate your monthly dues via studentaid.gov.

4. Review other options to pause repayment

The federal government’s special administrative forbearance isn’t the only way to press pause on your repayment. There are all sorts of deferment and forbearance options, including:

DurationEligibility
Unemployment defermentUp to three yearsIf you’re out of work
Economic hardship defermentUp to three yearsIf you’re receiving welfare benefits, earn especially low income or are serving in the Peace Corps
General forbearanceUp to 12 months at a time for a maximum of three yearsGranted at your loan servicer’s discretion, based on your financial challenges, medical expenses, employment or other factors
Student loan debt burden forbearanceUp to 12 months at a time for a maximum of three yearsIf your monthly federal loan dues are greater than 20% of your gross income

 

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

  • Must be applied for and are never automatically granted
  • Accrue and capitalize interest in most cases, except on subsidized loans and Perkins loans during a deferment
  • Can be reported to the credit bureaus and possibly affect your credit score

5. Explore non-federal forms of loan relief

When the federal loan suspension ends, whether that’s in early 2021 or beyond, other support options will still exist.

So, if IDR and interest-accruing postponements like deferment and forbearance aren’t enough — or if you have private student loans to tend to as well — don’t forget to …

6. Maintain communication with your loan servicer

If you don’t remember the last time you checked in on your debt repayment options, track down your federal loan servicer, and ask for assistance when you need it.

While you’re at it …
Ensure your servicer has your up-to-date contact information. With federal loan servicing contracts set to expire by the end of 2020 — and a host of new loan servicers coming aboard — your debt could be transferred.

This advice goes for private student loan relief, too. It never hurts to ask your bank, credit union or online lender for support.

A Student Loan Hero survey in June found that 70% of private loan borrowers who asked for lender support were successful in receiving it. Whether you’re offered modified repayment terms or a lower monthly payment, you might be surprised by a lender’s generosity.

7. Consider student loan refinancing, but don’t apply just yet

With the federal government picking up the tab on your student loan interest (at least for now), it makes little sense to refinance your education debt to a lower interest rate. No bank can beat Uncle Sam’s current offering of 0%.

With that said, the interest rate freeze isn’t forever. When your rates return to their normal levels, it could make sense to refinance federal loans. After all, private lenders are also offering very low interest rates in this coronavirus-affected economic environment.

Just be sure you won’t miss federal loan protections — like access to IDR, deferment and forbearance, plus forgiveness programs — before you make the irreversible decision to refinance.

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

Published in News & Policy