Student Loan Interest Freeze Extended — But You Should Prepare for Repayment Now

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The current federal student loan freeze, a lifeline pausing repayments interest-free for millions of borrowers in the wake of the pandemic, is set to expire on Dec. 31, 2020.

While it’s possible the payment suspension and 0% interest period could be extended yet again by Congress, by the outgoing Trump Administration or by the incoming Biden Administration, 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 any additional harm to your credit report.

By acting now, you’ll be best equipped to handle the resumption of loan payments, whether it occurs on the first day of 2021 or much later. Let’s try to answer these two questions:

Will the student loan interest freeze be extended?

The federal loan repayment pause, signed into law March 27 via the Coronavirus Aid, Relief and Economic Security (CARES) Act, was only supposed to last through Sept. 30, 2020. However, the resurgence of the COVID-19 crisis and its effect on the economy prompted a White House order to extend the relief program.

As of Aug. 8, deferred payment status and interest freeze on all federally held student loans was extended to Dec. 31, 2020. Despite this option to pause repayment, borrowers can also elect to keep making monthly payments, which is a potential strategy to shorten the repayment term.

How the student loan relief extension came to be …

Senate Republicans had stopped short of prolonging the student loan interest freeze, with Sen. Lamar Alexander (R-Tenn.) instead pitching a more streamlined menu of repayment plans. House Democrats, for their part, passed the Health and Economic Recovery Omnibus Emergency Solutions (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 instead.
  • 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 August action limited temporary relief to student loans on the federal government’s balance sheet. As before, privately-owned Federal Family Education Loans (FFEL), school-sourced Perkins loans and alternative loans lent by banks and other entities were excluded.

Fortunately, however, loans not covered by government relief could be supported by state governments and private lenders.

Even if President-elect Biden plans to back borrower relief by extending (or perhaps expanding) the student loan freeze, he won’t enter office until Jan. 20, 2021. That leaves a precarious three-week gap in which many federal loan borrowers could have payments come due.

If no action is taken by the end of December, here are some ways to prepare for the return of student loan repayment.

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, at no cost.

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 — consider the following moves:

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