UPDATE MARCH 31, 2021:
On March 30, 2021, the ED expanded the suspension on interest and collections to defaulted FFEL Program loans. According to the ED, this relief is retroactive to March 13, 2020 (when COVID-19 was declared a national emergency in the U.S.).
How does the retroactive relief work?
- The ED plans on automatically returning wage garnishments and seized tax refunds during the retroactive period.
- Any loans under the expanded relief that went into default during this period will be returned to good standing, and requests to remove default records will be made to the credit unions.
- Voluntary payments made toward these loans can have refunds requested.
- It is unclear if and how the 0% interest rate will be retroactively applied.
President Biden took office on January 20, and in a historical move to combat several ongoing crises across the country, signed 17 executive orders. One of these orders requested the Department of Education (ED) continue the pause on federal student loan repayments amidst the ongoing COVID-19 pandemic, bringing continued relief for tens of millions of borrowers.
As legislation continues to change regarding COVID-19 and student loan repayment, we’ve provided the answers to a few important questions regarding student loan debt during the current pandemic.
How Do I Know If My Student Loans Are Suspended?
The suspension of payments and the accrual of interest applies only to student loans that are held by the federal government. You can check if your loan is held by the Department of Education on studentaid.gov. Even if you don't have a federal loan, your FFEL (Federal Family Education Loan) lender, private lender, or school may have suspended interest and payments voluntarily, but they aren't required to do so. You'll need to contact your lender to find out what your options are - some institutions may have a hardship program or a policy to suspend payments to those who ask for it.
What Do I Need to Do to Suspend My Payments or Interest?
If you have a federal student loan, no action is required on your part, as these payments will have been suspended. However, it's always good practice to check your account to make sure interest isn't accruing, your account isn't being incorrectly marked as delinquent, or automatic payments are still being paid.
If you have private loans from an institution that hasn't suspended payments voluntarily, you can ask for a forbearance. Different lenders will have different policies, but one thing to look out for is whether interest will continue to accrue during that period.
Should I Continue Paying My Loans Anyway?
President Biden campaigned on forgiving $10,000 of federal student loans per student while Senators Elizabeth Warren and Chuck Schumer continue their push for $50,000 in forgiveness. Does that mean student loan forgiveness is around the corner and continuing to pay your loans is a waste? Biden is pushing Congress to agree upon further reforms and forgiveness and therefore isn't likely to act with an executive order, and I'd also be surprised if Congress acted quickly on student loan forgiveness - any agreement would probably come after long negotiations with substantial concessions elsewhere.
If you currently have $10,000 or less in student loans outstanding, and your loan payment and interest is currently suspended, my broad stance is now to shift monthly payments into a separate savings account or low-risk investments. The reasoning: there's significant pressure for at least $10,000 of loan forgiveness by Democrat lawmakers, and while I don't think it will happen in the immediate future, we're at least likely to know more by the time payments resume. If your debt is forgiven, you can permanently move the money you set aside to long-term savings and investments. If your debt isn't forgiven, you have the money still set aside to make a lump-sum payment. Just don't spend the money you set aside before you know whether or not your loans are forgiven! If your loans aren't forgiven, you've fallen behind. In that vein, if you don't think you can resist spending the money you'll set aside, don't set aside the money and keep paying your student loans.
If your loan payments haven't been suspended, continue paying to avoid defaulting and adding a black mark to your credit. It's a bit more nuanced if your payments have been suspended but interest still accrues, and the decision would come down to your individual situation and tolerance of the possibility of paying more in the long run.
If you are trying to qualify for Public Service Loan Forgiveness (PSLF), this Department of Education blog post answers some key questions specific to PSLF. In essence, full-time employees of qualified employers with non-defaulted Direct Loans can take advantage of suspended payments and have those $0 payments count towards the 120 required payments. You'll need to submit an Employment Certification Form and meet other requirements, so check out that post for important information directly from the ED.
What Should I Do If I’m Behind On Payments?
The Department of Education said in March last year that it would not be withholding federal tax refunds, Social Security payments, or garnishing wages from those who have defaulted on their federal student loan payments. Private collection agencies contracted by the government will also put a pause on attempting to contact defaulted borrowers.
As the COVID-19 pandemic continues into 2021, you’re likely experiencing some level of stress and anxiety around your finances. Continuing to make regular payments to your federal student loans can be beneficial in the long run, but it’s important to know how your options are evolving amidst this global crisis. If you’re unsure whether you should put a pause on your student loan payments, get in touch with your financial advisor or feel free to send me an email or schedule a time to talk.