If you have federal student loan debt, you now have approximately four months to prepare for the payments on that debt to restart. In August, the administration of President Joe Biden announced that it would extend the suspension of federal student loan payments until January 31, 2022.
This means that payments will not resume until next year and interest rates will remain at 0%. The latest extension comes shortly after two-thirds of borrowers said it would be difficult for them to afford payments if they resumed the following month, according to a recent survey by Pew Charitable Trusts.
“What a great opportunity for borrowers to take more control of their finances,” says Laurel Taylor, CEO and founder of FutureFuel.io, a student debt repayment platform. “The repayment hold will be about two years as we look forward to January 31. I would really like to encourage borrowers to maximize this opportunity – whatever that means for them.”
The freeze on federal student loan payments was originally scheduled to expire at the end of September. This latest extension will be the “last” extension, according to a statement from the US Department of Education.
Make sure your address and email are up to date with your loan service, so you don’t miss any important information about your student loans and temporary extension.
This means that any student loan debt you had before the COVID-19 pandemic will be waiting for you when repayment begins at the end of the forbearance period, unless the policy changes again. Experts say you shouldn’t count on any of your debts going away in the meantime, because there’s unlikely to be large-scale student loan forgiveness — not even the $10,000 Biden promised during the campaign, that is.
“I don’t see a coming out for $10,000 student loan forgiveness. I don’t think he can legally without Congress,” says Robert Farrington, founder and CEO of The College Investor, a site that advises on student loan debt. It’s good with the powers it has, like fixing already existing software.”
What to do in light of Biden’s extension of student loan relief
Given this latest update, now might be a good time to rethink your student loan repayment strategy. Keep in mind that everyone’s situation is different, but here’s what you should do in light of the student loan repayment freeze extension, according to the experts we spoke to.
If you have experienced job loss or reduced income
Use this time to give yourself some breathing space to tackle your other financial priorities. If you are unemployed or your income has decreased over the past year, stay focused on making your necessary expenses, such as rent or mortgage payments, utilities, groceries, transportation, and the like.
This relief is aimed at people who have experienced job loss or reduced income. I advise them to focus on necessary living expenses and try not to feel guilty or anxious about setting aside money for student loans because this time it works for you,” says Cindy Zuniga Sanchez, personal finance coach and founder of Zero-Based Budget, a financial education platform on Instagram.
Another thing you can do to lower your monthly payments when they fall due is to apply for income-based payments. The Income-Based Payment Plan is a monthly payment based on the size of your family and a percentage of your discretionary income. If you earn less than 150% of the federal poverty line, your payments could be up to $0.
To register, go to this Federal Student Aid page, and click “Login” at the top to begin submitting an application. If you are already enrolled in an income-paid plan and your income has changed, ask your lender to reconfirm your income before resuming payments. If you pay all of your payments on time, the IDR plan allows your loans to be canceled at the end of the repayment period — even if they haven’t been paid in full.
If you are unsure of the best repayment option for you, contact a loan service for assistance or go to studentaid.gov.
“Keep in mind that your payments may not actually cover the interest accrued on your loan, which means you may end up paying a large amount in interest,” Zuniga Sanchez says. “I want to put this warning out there because it is very important that you are notified when we make these changes to student loan repayment strategies.”
If you still have a job or income
You can use these extra months to help funnel some money toward an emergency fund or pay off more high-interest debt, such as credit cards or private student loans.
No one should be making extra payments for their loans at this time. “Even if you are able to, you should save that money and cancel other debts,” says Farrington.
If you haven’t already, prioritize creating an emergency fund first. Try to set aside three to six months of expenses, but don’t feel overwhelmed if saving seems like a far-fetched goal at the moment. Start small, and go from there. Next, focus on paying off high-interest debt—these strategies can help you do just that. You can also use additional money to invest in retirement accounts, such as a 401(k), IRA, or Roth IRA, or pay off any low-interest debt you may have, such as medical debt or a car loan.
If you want to pay off your student loans during the 0% interest period, Farrington suggests putting that money into a savings account and then paying off a lump sum before the payments start again.
“That way, you keep that money for as long as possible,” he says.
If you are behind on your student loan payments
Since all collection activities resume once the extension is over, try to rehabilitate your loans as soon as possible. A federal loan default occurs when payments are past 270 days, sending your loans to collections and exposing you to damaged credit, withheld wages, and withheld tax refunds.
“Get rid of defaults even as payments and collections activity resume, you won’t be left with your paycheck or taxes forfeited,” says Farrington.
To rehabilitate your student loans and get rid of default, you will need to contact your loan service, fill out an application, and follow a specific process. If your application is approved and you make nine payments on time, even during this forbearance period, your loans will usually be transferred to a new loan service, and you will be out of repayment.
If loan rehabilitation isn’t possible for you at this time, additional deferment and forbearance outside of COVID-19 relief can give you more time to get back on your feet. For example, there are deferrals of unemployment and economic hardship, both of which temporarily suspend your student loan payments. But these options should be a last resort.
If you’re part of the majority, you probably haven’t made your student loan payments in nearly two years. Although the forbearance period has been extended, now is an excellent opportunity to review your finances and make a plan to resume payments next year.
For example, you may need to scale back or readjust certain spending areas now, so that you have room in your budget in 2022 when it’s time to pay. Based on the latest announcement, it’s safe to assume that student loan payments will be repaid in 2022 and it’s best to move forward on the curve as far as possible.
“Holding student loan repayments for two years is unprecedented, and it is an opportunity for borrowers to move forward,” Laurel says.