Student Loan Pause Extension: What You Should Know

On March 11, President Biden signed an executive order extending the pause on federal student loan payments and interest rates through August 31, 2022. This extension applies to more than 44 million federal student loans. If you have a federal student loan, your loan servicer will automatically place your loan in forbearance for the remainder of the extension. During the loan pause, borrowers are not required to make any payments on their loans or accrue any interest. However, if possible, by continuing to make payments, you will decrease the loan balance and save interest over the life of the loan. On the other hand, the student loan pause can provide some much-needed relief for borrowers struggling to make ends meet during the recovery from the pandemic. A benefit of the current extension is allowing borrowers more time to explore other repayment options, such as income-driven repayment plans or loan consolidation. The consequences of defaulting on a student loan can be severe. The entire unpaid balance of the loan, plus any interest and fees, becomes immediately due and payable. The borrower’s credit score will be impacted negatively, making it more difficult to obtain future loans. In addition, the borrower may be subject to wage garnishment, tax offset, and seizure of federal and state tax refunds. Student loan defaults can lead to legal action, including lawsuits and wage garnishment.

When do student loan payments resume?

This Student Loan Payment Pause Extension was initially set to end on December 31, 2020, but has been extended multiple times. The most recent extension is set to expire on August 31, 2022. Borrowers who can make payments are encouraged to do so, as any payments made during the pause will be applied directly to the loan’s principal balance. It seems no one can provide firm direction as to where this hot potato will end up coming to rest. So, in the meantime, it will be challenging to take any definitive action. Instead, visit StudentAid.gov to stay abreast of any late-developing announcements. I recently did a “loan payments resuming” search query on StudentAid.gov, which was just as ambiguous. “The 0% interest period and payment pause will end August 31, 2022. You’ll receive your billing statement or other notice at least 21 days before your payment is due. If you don’t receive a billing statement at least 21 days before your payment due date, contact your loan servicer.”

What if you are one of the Ten million+ student loan borrowers struggling to make payments before the pandemic?

There is some good news from the Department of Education, which has declared that these affected student loan borrowers will start with a clean slate and begin expected repayments when loan payments restart. Of course, if you are still at risk financially, you will want to explore all options with your payment loan servicer.

What is driving the extension?

If you have watched any television lately, the tsunami of political ads confirms that this is a midterm election year where all 435 seats in the House of Representatives and 35 of the 100 seats in the Senate will be up for grabs. With over 44 million individuals with student loans and combining that with family and friends, this is a powerful voting bloc. This fact is not lost on the Biden administration or the other Washington DC power brokers.

Is this the sign of ‘debt cancelation’ to come?

Millions of people drowning under a Tsunami of student debt can do nothing but wait to find out if some or all of their debt will be forgiven. Based on the information that has been released, here is the direction President Biden seems to be heading?

• Student loan forgiveness will settle somewhere under $50,000
• Although an income limitation is being considered, it is expected to be waived in view of the backlog of millions of applications it would cause.
• It is more likely that whatever the final forgiveness decision, it will be unilaterally applied.
• It’s noteworthy that to date, more than 700,000 student loan borrowers have seen over $17 billion in debt forgiven via existing programs.

What are the student borrowing reforms to come?

Those against massive loan forgiveness cite these concerns:

• It doesn’t help the economy since it does not generate new money flowing into the economy by any more than the monthly payment the individual was required to make, say, $300 mo.
• They are unfairly skewed towards the well-off, as some studies report that the top 20% of income earners hold nearly one-third of current student debt.
• It creates a moral unbalance by rewarding those that had the doors opened up to go to college as opposed to those that life’s circumstances would not allow them to do so.
• Does nothing to address the enormous lifetime cost of a college education

Many advocates who are pushing for another extension of the pause argue the following.

• The scholar loan pause has helped ease the financial burden on many individuals. Freeing up money that hopefully, during this reprieve, has been used to better themselves financially, for example, paying off credit card debt, funding an emergency savings account, and maybe even becoming a first-time homeowner.
• For these reasons, advocates of extending the student loan pause contend that this would benefit both recent graduates and the economy as a whole. The decision on whether or not to extend the student loan pause will ultimately be up to the Biden administration. However, given the growing calls for another extension, it seems politically expedient that the pause will be extended again.

Will student loan forbearance be extended again?

NOTE: The following comments are speculative and can only reflect the information currently available. The political powers are holding their cards tightly to their chests, so the soonest there may be some concrete direction would be later in July. In the meantime, this is what could be expected:

• High-risk student loans will benefit from a fresh start with negative histories removed from their credit reports.
• At-risk student loans will still have other alternative payment options through their loan servicer.
• A $50,000+ loan forgiveness will apply across the board without an income ceiling.
• All student loans start over without derogatory items on their credit reports.

In conclusion, it would be wise for you to take the time now to explore all of your options so you can be prepared financially.

• Create and adhere to a budget with defined end goals.
• Do your best to reduce your outstanding consumer debt, especially credit card debt.
• Research your alternative loan refinancing options.

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