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Student Loan Forbearence Extended

January 27, 2021

Early this January, President Biden announced that he would extend the payment moratorium on student loans through September 30th, 2021. Those with student loans are left with questions about the debt forbearance and what they should do next.

First, make sure you understand what (and who) is included in the student loan forbearance.

What do you need to know about student loan repayment that has changed (temporarily) under the Cares Act?

  • All payments for federal student loans will be suspended through September 30, 2021. This only includes direct subsidized loans and indirect subsidized loans serviced by the federal government and does not apply to privately held loans.
  • No interest will accrue on your federal student loans through September 30, 2021.
  • All involuntary collection of student loan debt—through wage garnishment, Social Security garnishment, and tax refund offsets—will be suspended.
  • The federal government will report suspended payments as current to the national credit bureaus—which means skipped payments on eligible loans during this period won't appear as late on your credit report or impact your credit scores.

Note: If you do have private student loans, now may be a good time to refinance while interest rates are low. Refinancing could significantly reduce your payments, saving you thousands over time.

How do you know if your loan is included in the government forbearance?

You can check if you have federal student loans by accessing the National Student Loan Data System. Use your Federal Student Aid (FSA) ID to log in.

Will I get credit toward student loan forgiveness while my debt is in forbearance?

Yes, see details below if Public Service Loan Forgiveness or Income-Driven Repayment applies to you.

Public Service Loan Forgiveness applies to those who work with a qualified employer. Those who work for the government at any level are usually included. The automatic forbearance will not affect your progress with PSLF. If you remain working with a qualifying employer, the months in forbearance will count toward the 120 payments necessary to receive the forgiveness.

Also, Income-Driven Repayment plans require 20-25 years of monthly student loan payments to get loan forgiveness. If you don’t make a federal student loan payment during this forbearance period, you can still get “credit” as having made your payment for purposes of qualifying for forgiveness.

Why should I continue paying my student loans while in forbearance?

The reason to pay student loans now is that there is no interest accrual. So, every dollar you pay will first pay off any existing interest (from before the pause) and then any remaining amount will directly lower your student loan principal balance.

What are my other options?

There are several options that should be considered depending on your unique financial situation:

  1. If your livelihood has been severely affected by Covid-19 (loss of job or hours) and you are struggling to meet basic needs, then you should not be concerned about paying back your student loans during forbearance. Instead, use the freed-up income for things like rent and utilities. The intention of this forbearance is to provide relief for those who need it most. Also, speak with your student loan lender about setting up an income-driven repayment plan.
  2. If your income has not changed, but you have other high-interest debt, such as credit card debt, you could channel student loan payments toward that high-interest debt.
  3. If income has not changed and you have no high-interest debt to focus on paying off, start an emergency savings fund.
  4. If your income has not changed, no high-interest debt and already have a sufficient emergency fund but would rather hold off on repayment of student loans, put would-be student loan payments into a high-interest savings account. Let the account build interest until September (just before the payment moratorium ends), and then make a lump payment.

What About Potential Loan Forgiveness?

There has been discussion amongst some leaders pushing for loan forgiveness of up to $50,000. While $50,000 seems unlikely, President Biden has expressed interest in forgiving $5,000 - $10,000 dollars in student loans across the board.

It is important to note that this discussion will be slow-moving and may never gain enough support to pass. The best thing to do currently is to continue making payments to a high-interest savings account and submit a one-time lump payment at the end of September before forbearance ends (or potentially loan forgiveness is granted).

The Bottom Line

Repayment of your student loans should be based on a plan that makes sense for you… as long as you make a plan. Come October 1st, 2021 your federal student loan payments will be due, and interest will begin to accrue again. Get your financial game plan ready today, so you are not unprepared when the loan relief ends.