The past few weeks have brought some clarification—and many uncertainties—to the political forefront. And many people who have federally held student loans have a big question: What will happen when federal student loan relief ends?
First, a recap on federal student loans during COVID-19: When the CARES Act was passed in March, payments on federal student loans were put into forbearance for six months.
Payments were suspended, interest rates were set at 0%, and there was a moratorium on collections and wage garnishment for borrowers who had defaulted on some types of loans. The relief was set to expire on Sept. 30. But in August, President Donald Trump signed an executive order that continued the student loan payment relief outlined in the CARES Act through the end of 2020.
A new president-elect will take the oath of office on Jan. 20. Joe Biden ran on a platform that included student loan reform, but the majority of his proposed actions would require congressional approval—a process that can take months or even years after an act is introduced to process and pass. But Biden could sign a similar executive order that would continue to suspend payments and maintain 0% interest.
Trump, too, can use the power of executive order now to extend payment suspension through January and beyond. But there has been little clarity on either side over what the next steps will be.
If another executive order is not signed and a stimulus package does not pass during the lame-duck session, as policy stands now, borrowers would need to resume payments when the order expires, which is Dec. 31. That said, even during these weeks of uncertainty, borrowers can prepare for whatever circumstance may arise.
Keep Up With the News
Right now, politics can seem chaotic. But it’s important to assess what action is being taken on the executive level in regard to federally held student loan payment suspension and other COVID-19 relief strategies.
(To be clear, the forbearance applied to defaulted and nondefaulted Direct loans, defaulted and nondefaulted FFEL Program loans, defaulted and nondefaulted Federal Perkins Loans, and defaulted HEAL loans—if those loans are owned by the Department of Education.)
Senate Majority Leader Mitch McConnell has said that he would like to see another COVID-related stimulus bill pass before the end of the year. But for the past few months, Republicans and Democrats in Congress have been deadlocked on the size and scope of a bill, and particulars are still being discussed.
It is not clear whether federal student loan suspension would be part of a new stimulus deal, or how long the suspension would last.
Paying attention to breaking news about federal student loan suspension can help you assess next steps and make a plan.
Read Incoming Communications
Now may be a good time to open that envelope or email from your federal student loan servicer. If no action is taken on continued loan suspension, loan servicers are to inform borrowers about the date that loan payments will resume and provide information on the federal government’s loan repayment plans.
It’d be a good idea to pay attention to the communications and reach out to your loan servicer if you have questions or concerns.
Loan servicers may try to reach you by phone, mail, or email, so make sure you have updated information on file, especially if you moved or are not regularly at your mailing address.
Borrowers may notice that their loan payoff period is longer. That’s because the forbearance period was a break, but no part of the loan is forgiven. The loan is still expected to be paid in full.
There is, however, an exception for borrowers on income-driven repayment plans. The suspension will be credited toward their loan payments.
Borrowers who are part of the Public Service Loan Forgiveness plan may also receive credit for the suspended payments if they fulfill certain qualifications, including having a federal Direct loan, being on a qualified payment plan before the forbearance period, and working a minimum 30-hour week.
Those who were laid off or furloughed may not qualify. These specifics can make it tough to know how much you’re expected to pay, so if you have questions, contact your loan servicer before payments restart.
Assess Your Options
Many people are in very different circumstances than they were in March. Borrowers may need to take a look at their budget and assess how their federal student loan payments fit into their current financial picture.
Some may have no problem resuming payments. Others may want to consider refinancing or consolidation. With payments on pause, it can be a good time to explore options.
Consider Restarting Automatic Payments Early
Some borrowers in a position to resume student loan payments have already done so, or continued to make monthly payments even though it was not required. This move allowed them to take advantage of 0% interest and likely paid down the principal on their student loan.
As Jan. 1 looms, it may make sense to assess your budget and see what it would look like if you have to resume federal student loan payments.
Borrowers who decide to resume payments can contact their loan servicer to restart automatic payments. It may also be a good idea to ensure that any payments made during the relief period are going to the principal of the loan. You can clarify this with your servicer.
Consider an Income-Driven Repayment Plan
There are four income-driven repayment plans. Most federal student loans are eligible for at least one:
• Pay As You Earn (PAYE)
• Revised Pay As You Earn (REPAYE)
• Income-Based Repayment Plan
• Income-Contingent Repayment Plan
Eligibility depends on your type of loan and your circumstances, but the commonality for all is that your payment is set at an amount that is “affordable based on your income and family size.” If you qualify, you’ll pay a certain amount of your discretionary income over a set period of time. After that period is over, the loan may be forgiven.
For example, under REPAYE, you’ll typically pay 10% of your discretionary income for 20 years (25 if the loans were graduate school or professional study loans). It may take less than 20 years to pay off your loans, especially if your income rises.
For any income-driven repayment plan, periods of deferment due to economic hardship (such as a job loss) will count toward your repayment period, so you would not be paying loans beyond the set amount of time set by the repayment plan.
Federal income-based payment programs require you to recertify your income every year, and your repayment changes based on income and family size.
Some borrowers find that the unknown is tough to navigate and prefer setting autopayments that do not change unless the loan is refinanced, consolidated, or put into deferment.
Another consideration of income-based repayment plans is that, as of now, any amount forgiven after the repayment period is considered taxable income.
Apply for Additional Relief
The CARES Act and subsequent executive action recognized that COVID created economic uncertainty on a national scale. But there are options available for deferral or forbearance if a federal student loan borrower is struggling with finances.
Forbearance and deferral pause payments, but they may differ in interest accrual rules. Qualifications for either depend on your type of loan and reason for requesting forbearance or deferral.
Under forbearance, interest will usually accrue during the period, which will increase a borrower’s balance and lead them to pay more over the life of the loan. During deferment of a federal student loan, interest does not typically accrue.
Consider Consolidating Loans
Consolidation allows borrowers with more than one federal student loan to combine them into one loan with a fixed interest rate that is the average of the rates of the loans being consolidated (rounded up to the nearest one-eighth of a percentage point).
Borrowers may see a change in monthly payments when they consolidate their loans into a Direct Consolidation Loan, but one of the biggest benefits is convenience. Instead of multiple loans to track each month and multiple payments, there is one payment a month, at a fixed interest rate.
The length of the loan also may change, so it’s important for borrowers to consider the length and interest paid over time, as well as the monthly payment, to assess whether the consolidation makes sense for their financial goals.
Then There’s Refinancing
Interest rates on many lending products offered by private lenders are at near-historic lows, thanks to the Federal Reserve’s near zero interest rate. In June, the Fed announced that it planned to keep interest rates close to zero through 2022 to continue economic support during the COVID pandemic.
The announcement led to private lenders also lowering rates, which led many borrowers to refinance loans, including mortgages and private student loans.
Deciding to refinance federal student loans depends on a number of factors. One thing that is important to note is that refinancing federally held student loans means the loans are no longer federal loans and as such, are no longer subject to federal benefits like income-driven repayment plans, Public Service Loan Forgiveness, or federal forbearance.
If you refinance your student loans, a new, private loan will pay off the federal student loans, meaning you will have a new lender. Refinancing can be a good choice for working graduates who have high-interest Direct Unsubsidized Loans, Graduate PLUS loans, and/or private loans. Again, those who refinance will have the ease of one loan and one monthly payment.
It’s important to read the fine print and compare offers among lenders. Some companies provide benefits that may ease concerns about the future. For example, SoFi® offers unemployment protection to eligible members, allowing them to pause loan payments if they were to lose their job through no fault of their own.
It’s also important to understand interest rates, and how a variable rate could affect payments if interest rates were to rise. Different lenders also may have fees.
Comparing options, plugging in numbers, and weighing different scenarios based on your current financial picture and your goals may be helpful in assessing whether refinancing is an option for you.
SoFi® refinances student loans with low fixed or variable interest rates, flexible terms, and no application or origination fees. Members get access to career coaching, member events, and more—at no cost.
The Takeaway
While there may be a lot up in the air, existing student loans aren’t likely to disappear any time soon.
Understanding the repayment options available can help borrowers make a plan to handle their debt when federal student loan relief ends.
SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF DECEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION. Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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