The payment pause and interest waiver for federal student loans is scheduled to end on December 31, 2020. Will it be extended? What are your options if it isn’t extended?
Temporary Financial Relief for Federal Student Loan Borrowers
The payment pause and interest waiver provides financial relief to federal student loan borrowers during the coronavirus pandemic.
President Trump originally announced a 60-day payment pause and interest waiver for government-held federal student loans on March 13, 2020. This was expanded and encoded into law by the CARES Act, which set a September 30, 2020 expiration date. More than a month before the payment pause and interest waiver was set to expire, President Trump extended it through the end of the year.
The payment pause and interest waiver suspends the repayment obligation for federal education loans held by the U.S. Department of Education and sets the interest rate temporarily to zero. The payment pause and interest waiver is automatic. This means loans are not accruing interest during this period.
Eligible loans include all federal student and parent loans in the Direct Loan program and some ECASLA loans. ECASLA loans are guaranteed student loans made in the Federal Family Education Loan Program (FFELP) in 2008-09 and 2009-10 under the Ensuring Continued Access to Student Loans Act. Lenders transferred title to many of the ECASLA loans to the U.S. Department of Education.
Commercially-held FFELP loans are not eligible. Borrowers with ineligible FFELP loans can make them eligible by including them in a Federal Direct Consolidation Loan.
Private student loans and private parent loans are not eligible, even if they refinanced federal loans.
Will the Payment Pause Be Extended Further?
It seems likely that the payment pause and interest waiver will be extended again, because further extensions have strong bipartisan support.
There are three ways the payment pause and interest waiver might be extended.
- When President Trump signed the executive order extending the payment pause and interest waiver through December 31, 2020, he said that he would extend it further, “most likely right after December 1.”
- The Heroes Act includes an extension of the payment pause and interest waiver through September 30, 2021. This legislation passed the U.S. House of Representatives, but is stalled in the U.S. Senate. An extension of the payment pause and interest waiver will probably be included in the final version of this COVID-19 relief bill, as there is strong bipartisan support for an extension. Congress could pass a version of this legislation during the lame duck. Members of Congress on both sides of the aisle have called for passing the next COVID-19 relief bill before the end of the year.
- President-elect Joe Biden might use the same authority invoked by President Trump to extend the payment pause and interest waiver through December 31, 2020 to extend it further after he takes office on January 20, 2021.
Other Options for Financial Relief
If the payment pause is not extended, borrowers will have to start repaying their federal student loans starting on January 1, 2021.
There are several options for borrowers who still need help repaying their federal student loans. After all, the pandemic isn’t going to magically end on January 1. Unemployment remains high, especially for recent college graduates.
Some of these options are best for short-term financial difficulty and some are best for long-term financial difficulty.
Options for Short-Term Financial Difficulty
If a borrower has lost their job or does not yet have a job, but expects to get one soon, they should seek a temporary suspension of the repayment obligation on their federal student loans. These include the unemployment deferment, economic hardship deferment and forbearances.
During a deferment, the federal government pays the interest on subsidized loans but not on unsubsidized loans.
During a forbearance, the federal government does not pay the interest on subsidized and unsubsidized loans.
During both a deferment and forbearance, the accrued but unpaid interest remains the responsibility of the borrower. If the borrower does not pay the interest that is not paid by the federal government, it will be capitalized by adding it to the loan balance at the end of the deferment or forbearance period.
Eligibility for the unemployment deferment requires the borrower to be receiving unemployment benefits. Borrowers can also qualify if they are looking for full-time work, but unable to get a full-time job.
Eligibility for the economic hardship deferment requires the borrower to be receiving federal or state public assistance (e.g., TANF, SSI or SNAP), serving as a Peace Corps volunteer, working full time but earning less than the federal minimum wage, or working full time but earning less than 150% of the poverty line.
Options for Long-Term Financial Difficulty
If a borrower has a job, but it does not pay well enough for the borrower to be able to repay their federal student loans, they should consider alternate repayment plans like extended repayment and income-driven repayment.
Extended repayment reduces the loan payment by increasing the term of the loan. Increasing the repayment term from 10 years to 30 years can cut the monthly loan payment nearly in half. But, a longer repayment term can significantly increase the total interest paid over the life of the loan.
The income-driven repayment plans base the loan payment on a percentage of the borrower’s income, as opposed to the amount they owe. If the borrower’s income is less than 150% of the poverty line, the loan payment will be zero.
The Income-Based Repayment (IBR), Pay-As-You-Earn Repayment (PAYE) and Revised Pay-As-You-Earn Repayment (REPAYE) plans provide a partial interest benefit. During the first three years in an income-driven repayment plan, the federal government pays the accrued but unpaid interest on subsidized loans in IBR, PAYE and REPAYE. The federal government also pays half of the accrued but unpaid interest on unsubsidized loans during the first three years and on both subsidized and unsubsidized loans after the first three years in REPAYE.
If a borrower is already in an income-driven repayment plan and their income has changed, they can ask the loan servicer to recertify their income early.
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