Student Loan Interest Freeze Extended — But You Should Prepare for Repayment Now
The current federal student loan freeze — a lifeline pausing repayments interest-free for millions of borrowers in the wake of the pandemic — will now last at least through September 2021.
Ahead of his inauguration Jan. 20, President Joe Biden had indicated he would sign an executive order to extend the federal loan freeze until Sept. 30, back from the original expiration date of Jan. 31. The move means millions of borrowers have received at least 18 months of reprieve from their repayment since the pause first began in late March 2020.
Despite the extension of both the payment suspension and the 0% interest period — and although it could be codified by Congress in an upcoming stimulus bill — it’s worth being proactive. Particularly if you have a loan in default, you will want to rehabilitate your repayment while you’re free from collections and any additional harm to your credit report.
By acting now, you’ll be best equipped to handle the resumption of loan payments, whether it occurs in October 2021 or much later. Let’s try to answer these two questions:
How long are student loans interest-free? What steps can you take to prepare for resuming payments? How long are student loans interest-free?
The federal loan repayment pause, signed into law March 27, 2020, via the Coronavirus Aid, Relief and Economic Security (CARES) Act, was only supposed to last through Sept. 30, 2020. However, the resurgence of the COVID-19 crisis and its effect on the economy prompted a White House order to extend the relief program.
The Dec. 4 announcement specified that eligible borrowers’ “non-payments” would still count toward requirements for forgiveness under income-driven repayment (IDR) plans and the Public Service Loan Forgiveness (PSLF) program, as well as part of loan rehabilitation agreements.
It also clarified that federal loan borrowers in default won’t see their wages garnished while the interest freeze remains in place.
“The coronavirus pandemic has presented challenges for many students and borrowers, and this temporary pause in payments will help those who have been impacted,” DeVos said in a press release announcing the extension. “The added time also allows Congress to do its job and determine what measures it believes are necessary and appropriate. The Congress, not the executive branch, is in charge of student loan policy.”
As before, the December action limited temporary relief to student loans on the federal government’s balance sheet. Privately-owned Federal Family Education Loans (FFEL), school-sourced Perkins loans and alternative loans lent by banks and other entities were excluded.
How the student loan relief extension came to be … | |
2020 | July 30: President Trump said during his press briefing: “We also suspended student loan payments for six months, and we’re looking to do that additionally and for additional periods of time.” Aug. 8: Trump formally directed the Education Department to carry out an extension through Dec. 31, 2020 via executive order. Dec. 4: After hinting at the possibility before the November election, Trump directed Education Secretary Betsy DeVos to prolong the interest freeze through Jan. 31, 2021. |
2021 | Jan. 20: Biden formally extended the freeze via one of a dozen-plus executive orders on day one of his presidency.. |
The specifics of Biden’s newly-extended student loan freeze weren’t immediately clear, but they’re likely to follow guidelines handed down by the previous administration.
The Dec. 4 announcement, for example, specified that eligible borrowers’ “non-payments” would still count toward requirements for forgiveness under income-driven repayment (IDR) plans and the Public Service Loan Forgiveness (PSLF) program, as well as part of loan rehabilitation agreements.
It also clarified that federal loan borrowers in default won’t see their wages garnished while the interest freeze remains in place.
As before, the December action limited temporary relief to student loans on the federal government’s balance sheet. Privately-owned Federal Family Education Loans (FFEL), school-sourced Perkins loans and alternative loans lent by banks and other entities were excluded. That was also expected to be true of the Biden Administration’s order.
Fortunately, however, loans not covered by government relief could be supported by state governments and private lenders.
If no action is taken to extend the federal loan freeze beyond September, here are some ways to prepare for the return of student loan repayment.
7 steps to prepare for the end of the repayment suspension
Staying on top of the news is the first step in preparing for the resumption of your federal loan repayment, whenever it occurs. Staring at the screen, however, will only leave you waiting, hoping for good news.
To be more proactive — and prepared for not-so-good news — consider these seven steps:
Replenish your emergency fund Rehabilitate any loans in default Adjust your repayment plan Review deferment and forbearance options Explore non-federal government support Touch base with your loan servicer Keep student loan refinancing on your radar 1. Replenish your emergency fund, if you can
If you’re wondering whether to save money or pay off debt, the answer is clear, but only through the end of September. While the penalty-free repayment break remains in effect, refilling your rainy day fund should be a priority. This way, you’ll have a cushion in case you need to dip back into the fund to afford student loan payments down the road.
Generally, it’s wise to carry three to six months’ worth of expenses in your accessible savings account. With the future of the unemployment rate uncertain, however, the more savings you sock away, the better off you’ll be.
2. Rehabilitate any loans in default to before collections resume
The CARES Act promised an additional reprieve for federal student loan borrowers in default: a halt to collections and garnishments of wages and other monetary benefits. The Department of Education has also said it would refund $1.8 million worth of recent seizures. (If you haven’t been made whole, learn about how this borrower retrieved her tax refund.)
To avoid such penalties in the future, strategize how to get your loans out of default. Your options for federally-owned debt includes:
Rehabilitation | Make nine payments within 10 months, with the payment amount equal to 15% of your discretionary income | Monthly payment amount could be as low as $5, depending on your income Collections could continue until you’ve made all nine payments Removes the record of your default from your credit history, likely boosting your credit score Rehabilitation is a one-time opportunity |
Direct loan consolidation | Consolidate one or more federal loans into a new loan. You can agree to repay it on an income-driven repayment plan, or else make three straight, timely payments before consolidation occurs | Consolidation not possible until wage garnishment is lifted Won’t immediately remove the default from your credit report |
Payment in full | If you have the cash to do it, zero out your balance | Not practical for most borrowers |
3. Adjust your repayment plan or monthly dues, if necessary
Enrolling in an income-driven repayment (IDR) plan could make your payments more affordable when they resume. IDR plans limit your monthly dues to 10% to 20% of your discretionary income. They also account for your family size.
And you don’t have to wait until Oct. 1 to enroll. In fact, you can review your IDR options at any time — the government’s loan simulator tool could help you decide. After choosing the best repayment option for your situation, you can apply in 10 minutes, at no cost.
If you’re already repaying your debt via an IDR but have seen a decrease in household earnings (or an increase in family size), you could recalculate your monthly dues via studentaid.gov.
4. Review other options to pause repayment
The federal government’s special administrative forbearance isn’t the only way to press pause on your repayment. There are all sorts of deferment and forbearance options, including:
Unemployment deferment | Up to three years | If you’re out of work |
Economic hardship deferment | Up to three years | If you’re receiving welfare benefits, earn especially low income or are serving in the Peace Corps |
General forbearance | Up to 12 months at a time for a maximum of three years | Granted at your loan servicer’s discretion, based on your financial challenges, medical expenses, employment or other factors |
Student loan debt burden forbearance | Up to 12 months at a time for a maximum of three years | If your monthly federal loan dues are greater than 20% of your gross income |
Unlike the special administrative forbearance awarded to most federal loan borrowers in March, the above options …
… must be applied for and are never automatically granted … accrue and capitalize interest in most cases, except on subsidized loans and Perkins loans during a deferment … can be reported to the credit bureaus and possibly affect your credit score 5. Explore non-federal forms of loan relief
When the federal loan suspension ends, whether that’s in late 2021 or beyond, other support options will still exist.
So, if IDR and interest-accruing postponements like deferment and forbearance aren’t enough — or if you have private student loans to tend to as well — consider the following moves:
Seek out state government student loan aid Write to your elected representatives when these local programs aren’t enough Talk to your employer about student loan relief benefits Along the way, be wary of coronavirus student loan scams promising help for a fee 6. Maintain communication with your loan servicer
If you don’t remember the last time you checked in on your debt repayment options, track down your federal loan servicer, and ask for assistance when you need it.
Ensure your servicer has your up-to-date contact information. With federal loan servicing contracts set to expire by the end of 2020 — and a host of new loan servicers coming aboard — your debt could be transferred. |
This advice goes for private student loan relief, too. It never hurts to ask your bank, credit union or online lender for support.
A Student Loan Hero survey in June 2020 found that 70% of private loan borrowers who asked for lender support were successful in receiving it. Whether you’re offered modified repayment terms or a lower monthly payment, you might be surprised by a lender’s generosity.
7. Consider student loan refinancing, but don’t apply just yet
With the federal government picking up the tab on your student loan interest (at least for now), it makes little sense to refinance your education debt to a lower interest rate. No bank can beat Uncle Sam’s current offering of 0%.
With that said, the interest rate freeze isn’t forever. When your rates return to their normal levels, it could make sense to refinance federal loans. After all, private lenders are also offering very low interest rates in this coronavirus-affected economic environment.
Just be sure you won’t miss federal loan protections — like access to IDR, deferment and forbearance, plus forgiveness programs — before you make the irreversible decision to refinance.
For any other outstanding concerns about your education debt, visit our Coronavirus Information Center.
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