The coronavirus pandemic has killed hundreds of thousands in the U.S., sickened millions more, and delivered the biggest hit to the global economy since the 2008 financial crisis, if not the Great Depression. Yet the bills for many Americans, especially student borrowers, have actually become less burdensome.
Thanks to the moratorium first put in place by the Trump administration last March, and extended by the Biden administration until at least the end of September, borrowers of federally-owned student loans do not have to pay interest or principal on their debt—the loans are essentially frozen.
The typical U.S. student loan payment, according to the most recent Federal Reserve data, is between $200 and $299 a month. The moratorium has provided substantial relief to millions who were struggling with loan payments before the pandemic hit, and increased the spending power of those who were comfortably making payments.
But at some point, those bills will come due again. Here’s how to plan for the future.
You Have Federal Loans But You Still Have an Income
For those who were able to afford their student loan payments before the moratorium began, and haven’t seen their income fall, there are a few options to consider.
This may be an opportunity to direct the money you would be paying on your student loans to other savings that get pushed aside when student debt payments are due.
“So many people right out of college don’t have a lot of wealth accumulated, they haven’t built up their savings...whether retirement savings, or savings for an emergency,” said Bruce McClary, a senior vice president at the National Foundation for Credit Counseling.
In other cases, it actually makes sense to keep on making your loan payments. This is a rare opportunity to continue paying down the principal of the loan with the interest rate dropped to zero.
Beyond the immediate financial cost of paying back student loans, there’s research showing that just having the debt hanging over you makes life more difficult — and getting rid of it can bring benefits.
One study found that after a judge cancelled the debt of a group of borrowers over a procedural violation, they were more likely to change homes and jobs, and the income of the borrowers went up by about $3,000 in three years.
“Just the clearing out of that debt had such a monumental impact with people’s lives,” said Alexis Goldstein, a senior policy analyst at Americans for Financial Reform.
“Folks with student loan debt are less likely to own homes and start families, and start businesses,” said Persis Yu, the director of the Student Loan Borrower Assistance Project at the National Consumer Law Center. “This may be a time to help remedy some of those problems or highlight how the world could be better if people didn’t have student loan debt, even if folks are financially OK.”
Be warned, though, aggressively paying down student loan debt won’t necessarily make sense if you expect your loans to be forgiven in the future. That would apply to people in the Public Service Loan Forgiveness program. Also, while this may be a good time to get into the Income Driven Repayment program, which allows a borrower to lower their loan payments in accordance with their income, it may not make sense for high-income borrowers who would be better off paying down their debt now.
You Have Privately Held Federal Loans
The student loan moratorium only covers loans owned by the federal government. But that doesn’t include some federal student loans that are held by private companies, also known as Federal Family Education Loans (FFEL).
“If you’re a young student borrower, you’re more likely to be covered,” Goldstein said, pointing to 2010 laws that transitioned the federal student loan system from the government guaranteeing certains loans to making them itself. “If you’re older, it’s more likely your loan is not a direct loan.”
But that doesn’t mean aid is entirely out of reach for borrowers whose loans aren’t part of the current moratorium, according to Yu. They can consolidate their FFEL loans, which would make them eligible for the moratorium and other benefits. But be careful: that doesn’t necessarily make sense for every borrower, and in some cases could result in an interest rate penalty, or losing benefits associated with a specific loan program.
For borrowers who are currently not making tons of money, now could be a good time to apply for Income Driven Repayment, as you get credit for being enrolled in the program and towards eventual forgiveness even if you’re not paying back any loans.
You Can’t Make Payments Right Now
Almost 11% of student debt was delinquent in the beginning of 2020, and many other borrowers were already straining their finances to make payments.
“For people who are suffering and struggling financially this [moratorium] is a significant lifeline and it shouldn’t go to waste,” said McClary of the National Foundation for Credit Counseling.
Not only have mandatory payments stopped during the moratorium, but collections have as well, meaning wages or tax refunds can’t be garnished to forcibly pay back loans.
While federal loan payments won’t pile up right now, rent payments can, even with a national eviction moratorium. That means that if you can’t pay both, rent payments should be prioritized over getting ahead on your student loans.
The best way to take full advantage of the student loan moratorium is to also make sure you’re taking advantage of any of the other temporary assistance programs for people in need, according to McClary. These include expanded state unemployment benefits and stimulus checks, as well as moratoria on evictions, and in some cases, moratoria on cutting off utilities in the case of non-payment.
You’ve Already Defaulted
For people who defaulted on their student loans before a moratorium was put in place, you have the option of rehabilitation, which is an Education Department program for getting current on a defaulted loan.
To rehabilitate a loan, you need to make nine payments on it in 10 months. If you enter a loan rehabilitation program before the student loan moratorium ends, you can get credit towards those nine payments even if they’re not actually made due to the suspension.
But proceed with caution. Rehabilitation is not necessarily the best option for every borrower.
“Redefaulting is worse than defaulting in the first place,” said Yu. Defaulting a second time bars a borrower from future rehabilitation or consolidation.
Don’t Forget About October
While few student borrowers likely need to be reminded of it, any changes you make — whether increased saving, different spending habits, or some combination of the two — you should be ready to switch them back come October 1.
“It may slip your mind and you may get comfortable with our new budget and new priorities,” McClary said. “Use whatever calendar you use, Outlook, Google, whatever. Set up reminders that let you know when you’re getting close to the end of this student loan payment reprieve.”