Following the declaration of the global pandemic in March of 2020, the Trump administration instituted a federal student loan moratorium that resulted in an immediate pause on student loan payments and interest accrual for federal student loans. Furthermore, federal loan servicers were prohibited from taking action on borrowers in default before the start of the pandemic.
The program was set to expire, and loan repayments were set to restart on February 1, 2022. However, amidst the current rising concerns of COVID-19, the Biden administration announced an extension on December 22, pushing the restart date back to May 1, 2022.
In addition to economic effects of the latest COVID-19 concerns, the new extension comes as a result of the administration’s concerns about the financial hardship of restarting payments before borrowers are ready. Additionally, the challenge posed to federal loan servicers is significant, who will be required to restart more than 30 million loan payments at one time.
Borrowers should assume that payments will resume in May and take advantage of the extension as best they can. For many borrowers, this time presents a unique opportunity to pay down principal while not accruing interest (for those that are in the financial position to do so).
Make Principal Payments During the Moratorium Period
Student loan payments are structured like many other loan payment types, with a portion of each payment going toward the principal (the amount of money you borrowed) and the other portion going toward the interest. The more you can allocate towards paying the principal, the sooner you can pay down the debt —which ultimately means you’ll pay less in interest over the life of the loan. You could potentially make a significant dent in your overall debt before interest starts to accrue when required payments resume.
When the moratorium expires in May 2022, the freeze on student loan payments will have been in place for over two years. With average monthly payments on student loans at $400, borrowers who were able to continue making payments on their principal during the moratorium could have paid down their student loan debt by more than $10,000 by the time that normal payments resume.
If you have not been making payments toward your principal since the moratorium went into effect, it’s not too late. The extension provides an additional three months to make payments on your principal, which will still save you money on interest in the long run.
Use Your Extra Funds to Pay Off Other Debt
If you can, allocate what you would be paying toward student loans toward the principal of other high-interest debt to pay down that debt more quickly. For example, if the interest rates on your student loans are lower than the interest rates on other debt you carry, (including credit card debt, vehicle loans, or personal loans), you may be able to make headway on the more expensive debt.
Like many Americans, your financial status may have changed since the first student loan moratorium began in March of 2020. To build a debt repayment strategy tailored to your current situation, you will need a full understanding of your current debt. Start by making a list of all of your student loans (private and federal), then any other loans or lines of credit you owe on.
For each of the loans that you listed, write down the balance, interest rate, monthly payment, and the company that services the loan. Make a note of how much you are paying towards each loan per month. Then, organize the list by putting debts with the highest interest rates at the top and the lowest interest rates at the bottom.
During the time that the moratorium is in effect, use this time to pay as much as you can toward the debts with the highest interest rates. Ideally, you want to put as much money as you can towards your highest interest liabilities and work your way down the list.
How to Be Prepared Once Student Loan Payments Resume
Given the time that has lapsed since many borrowers made their last student loan payment, there understandably may be confusion as to what to do when the time comes to resume payments. For many, the loan repayment process came to a complete halt as communication ceased with loan servicers altogether, several of which have shut down. Due to a lack of clear direction from the Department of Education, 35% of borrowers say that they don’t know how much their payment will be once they restart and 21% are unclear as to what student loan payment options they qualify for.
The more proactive you are, the less uncertainty you will face. Here are four things you can do to prepare for the expiration of the student loan pause extension.
Update your contact information
Make sure your home address, phone number, and email address are up to date with your loan service provider, so that you will receive important updates. Additionally, log into your dashboard with StudentAid.gov to ensure that your information is accurate with the Federal Student Aid Office. Borrowers who set up automatic payments prior to the moratorium will also need to make sure their banking information is up to date by May.
Verify your new payment amount and loan servicer
As payments resume, many borrowers will find that their student loans are serviced through a different provider than they worked with before the pandemic. This is because several of the major loan servicers terminated their contracts with the government (as of 2022), thereby transferring their contracts to different loan servicers.
Although the Department of Education and participating loan servicers are working diligently to prepare for payments to resume, expect some glitches. From an administrative perspective, scheduling and preparing systems to accept more than 30 million payments at once may take some time and kinks may need to be worked out.
Be proactive and start gathering information early. Reach out to your loan servicer before the end of the moratorium to confirm the date of your first payment, payment amount, and interest rate.
Familiarize yourself with repayment plan options
If your financial situation has changed throughout the pandemic, you will want to reevaluate your repayment plan and make sure it is still the best fit for you. A variety of repayment plans are offered by the Department of Education. Determining which plan is right for you will depend on individual circumstances and preferences.
To view your options, you can use Loan Stimulator, a free tool provided by the Federal Student Aid Office. For borrowers experiencing unemployment or increased living expenses resulting in financial hardship, an income-driven repayment (IDR) plan might be the best option. Based on income, an IDR plan could even result in $0 payments for qualifying borrowers. However, keep in mind interest may still accrue on loans (as if an IDR plan had not been put into place).
For individuals who cannot find a repayment plan that works for them, you can contact your loan servicer to request short-term relief. Applying for deferment or forbearance is an option to consider if you are experiencing extreme financial hardship.
For those who qualify, your payments could be temporarily put on hold, but it is important to be aware that in most cases, interest will continue to accrue. Any individual considering short-term relief options should thoroughly research the long-term financial implications and seek guidance before proceeding.
Partner With Lafayette Federal Credit Union
At Lafayette Federal Credit Union, we understand that student loan repayment can be stressful and confusing. The moratoriums put in place to provide relief for millions of borrowers may also have added an extra layer of uncertainty to your financial situation.
Our team is committed to helping our members by providing information and guidance, and to answer any questions that you may have. Contact us should you need any assistance with your student loan repayment plan.