If you’re one of the federal student loan borrowers who owe a portion of the $1.73 trillion in overall U.S. student loan debt, chances are you’ve been keeping a watchful eye on the state of federal student loan forbearance since the beginning of the COVID-19 pandemic.
As the rules for federal student loan forbearance have continued to be updated and extended, a large number of the 43 million student loan borrowers just like you have been trying to divine their options for delaying, reducing, or even eliminating their federal student loan debt in light of pandemic relief legislation. With so much information surrounding federal student loan forbearance, it’s little wonder many borrowers remain confused about what’s coming next.
The purpose of this article is to break through all that noise and help you understand what you need to do about your federal student loans going forward in 2021 and beyond.
(It’s important to note that private student loans are not part of the student loan programs discussed in this article. If you have questions about best practices for repaying your private student loans, you can find detailed information at CollegeFinance.com.)
Student Loan Forbearance vs. Forgiveness
Student loan forbearance and student loan forgiveness are two entirely different things. Failing to understand the difference could end up costing you a lot of money.
A loan forbearance program suspends your loan payments for a certain period of time. During forbearance, interest still accrues even though you’re not required to make payments. In most instances of loan forbearance, if you don’t continue to pay the interest on your loan, it will be capitalized at the end of the forbearance period. This means the interest that accrued during the time you weren’t making student loan payments gets added to the total amount you owe. This could result in a higher overall amount you must pay for your loan.
With its loan forgiveness program, the federal government cancels all or part of an educational loan received through the federal government if certain parameters are met. To qualify for loan forgiveness, the student loan borrower is required to do one or more of the following:
- Perform volunteer work
- Perform military service
- Teach in certain types of communities
- Practice medicine in certain types of communities
- Make a certain number of consecutive student loan payments
- Meet other criteria specified by the forgiveness program
Federal student loan forgiveness has been, historically, hard to qualify for. Recently, however, U.S. Department of Education Secretary Miguel Cardona announced President Biden’s plan to ease restrictions to qualify for the Public Service Loan Forgiveness Program (PSLF), which provides debt relief to teachers, nurses, firefighters, and others who enter the public service sector.
The State of Student Loan Forbearance in 2021
Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) on March 25, 2020. The act — which was signed into law on March 27, 2020 — paused federal student loan payments, dropped interest rates to zero, and halted collection efforts by the U.S. Department of Education on loans in default. So, unlike other instances of loan forbearance, with the current program, no loan interest accrues.
While this moratorium on payments, interest, and collections was originally slated to expire on Sept. 30, 2020, it has been extended several times. On Aug. 6, 2021, the U.S. Department of Education announced an extension of this forbearance policy until Jan. 31, 2022.
Because interest rates on federal student loans are reduced to zero during forbearance, there’s no accrual of interest, which is great for people who decide to pause payments. Once forbearance ends and their payments resume, they won’t have increased their overall loan liability.
Many people who can afford to continue with their payments during forbearance are doing so precisely because they can save on interest. While their payments remain the same, the amount that was formerly allocated to interest is now considered a payment against the principal balance, resulting in a lowering of the overall payment.
When Will Student Loan Forbearance End in 2021?
The current student loan forbearance policy is slated to end on Jan. 31, 2022. According to the Biden administration, there will not be another extension. If you’re a federal student loan borrower who has stopped paying down your student debt because of the CARES Act and the forbearance extensions, now is the time to start thinking about how you will manage your finances once the moratorium on mandatory student loan payments is lifted.
How to Prepare for Student Loan Payments to Resume
If you’re like many people who took an economic hit during the pandemic, not having to worry about your student loan repayments has been a blessing. The extra money you keep during the payment pause might have been used to pay down other debt or redirected toward keeping up with other critical bills. The time is approaching, however, to adjust your personal financial reality back to include management of your student loan debt. That process begins with assessing your budget, finding areas to reduce spending, making sure you know what your payments are and when they must be paid, and looking for options to reduce your amount of debt repayment.
Assess Your Budget
Begin by taking a snapshot of your current financial situation and assessing your budget in light of the additional financial burden you’ll be undertaking once your student loans begin or resume.
First, write down your full-time monthly income after taxes. Be sure to include any extra money you might make through freelance or gig work. The idea here is to get a realistic gauge of your monthly cash flow.
Next, write down all your fixed and discretionary expenses. This should include amounts you spend for:
- Housing
- Transportation
- Food
- Utilities
- Insurance
- Medical expenses
- Personal items
- Entertainment
- Paying down debt
- Savings
It’s important to understand where your money is going so you can see how you’ll handle the additional student loan payments when they start up again.
Cut Expenses
Now that you have a handle on how much you bring in and how much you pay out, you can determine if you will be able to cover the additional student loan payment or if you need to find ways to scale back on spending.
If your income has increased during the time your loan has been in forbearance, you might consider paying more than the required amount to reduce your overall loan liability. Even a little bit each month in this regard can go a long way in getting your loans paid off faster. The more principal you pay down, the more you can save on interest.
Note that if you’re seeking forgiveness under the PSLF program, you don’t need to make payments until Feb. 1, 2022, as the months of automatic forbearance count toward the 120 qualifying payments needed for forgiveness under that program.
If, as is the case with many people, you find you won’t be able to cover all your current expenses plus your student loan repayment, you should find ways to cut expenses or bring in more income.
Know When and How Much Your Payments Are
Don’t assume that your payments will be the same as they were before. Check with your loan servicer to get the exact amount for your monthly payments. The last thing you want is a surprise that throws your budget off track or gets you into a financial bind.
This is also a good time to confirm your loan payment due date. If possible, consider setting up your student loan payment as an automatic payment through your bank or the loan provider’s website so you’re never late on a payment.
Explore Repayment Plan Options
If you anticipate that you’re heading for a bumpy financial ride once your student loan payments begin again, you may want to explore your repayment plan options. For instance, the U.S. Department of Education may allow you to reset your monthly student loan payment based on how much you earn. These income-driven repayment plans (IDR plans) also have options to extend repayment for 20 or so years, offering forgiveness for any remaining balance. Graduated repayment plans — where payments are lower at first and then increase, usually every two years — might be another option if you find yourself struggling when payments are slated to resume.
You can also consider a consolidation loan or some other way of refinancing your student loans. Refinancing or consolidating student loans lets you bundle all your loans into one payment and often allows you to take advantage of lower interest rates. Which option you go for, though, depends on the type of loans you have and how much you stand to save.
Learn More About Your Student Loans With CollegeFinance.com
How to best manage student loans depends on a lot of factors, including how many education loans you have taken out, whether those loans are private or federal, who your student loan servicer is, and the ever-evolving politics surrounding how federal student aid is addressed by the White House and Congress.
CollegeFinance.com is your one-stop resource for information to help you make informed decisions about managing your financial situation before, during, and after college.
