Update 5/4/2022: On April 6, 2022, The Biden administration announced that it is again extending the payment pause on federal student loans through August 31, 2022.
As difficult as the last year has been, there’s one upside that many consumers have been relying on to keep their head above water – federal student loan forbearance. Unfortunately, that program is set to expire after September 30, 2021.
If you’re a student loan borrower who still hasn’t recovered financially from the pandemic and ensuing recession, that news may be unsettling. But don’t panic – we’ve got some tips to help you weather the storm.
Will President Biden Extend Student Loan Forbearance or Offer Student Loan Forgiveness?
Many financial experts find it difficult to believe that President Biden will offer loan forgiveness, even though he campaigned on that promise. Biden has released his 2021 budget proposal, and it doesn’t include any mention of student loan forgiveness or student loan cancellation.
Biden has shared that he would prefer for Congress to pass student loan forgiveness rather than passing forgiveness by executive order, but that possibility seems unlikely to become a reality. Because there isn’t universal support for student loan forgiveness in Congress, the best chance of it becoming a reality is if Biden issues an executive order.
While many have wondered if student loan forbearance will be extended, some experts speculate that Biden will not continue the initiative beyond September. This means millions of borrowers may have to start making payments for the first time since March 2020.
Ways to Prepare for Student Loan Payments to Resume
A 2021 survey found that 90% of respondents are not ready to restart their student loan payments.
In case student loan forbearance is not extended, here are a few basic student loan repayment strategies to consider:
Redo Your Budget
If you allocated extra funds toward other goals during the pandemic, like saving for retirement or a future wedding, now’s the time to look at your budget and see if you need to scale back.
If you don’t have a formal budget that you track regularly, go through your expenses for the past three months and write down how much you spend on average per month in each category. Then, add in your monthly student loan payments.
Compare the total amount spent each month to your post-tax monthly income. If you have a surplus, you don’t have to alter your spending. If there’s a deficit, then you’ll have to change some habits. This may involve spending less on dining, clothes or other non-essential items.
Switch to an Income-Driven Repayment Plan
There are five income-driven repayment (IDR) plans available for federal student loans, each with its own set of rules. All IDR plans calculate the monthly payment as a percentage of your income. Most borrowers will see lower payments when they switch from the standard plan to an IDR plan.
If you’re unemployed, your payment on an IDR plan will be $0. Those payments will still count and keep you from being in default.
Borrowers will have to resubmit their information every year, so payments may change depending on income and family size. You can also request a new payment if your financial situation changes. For example, if you lose your job, you can recertify your income to receive a $0 minimum monthly payment.
The remaining loan balance will be forgiven after 20 or 25 years on an IDR plan, depending on the type of plan and whether your loans were for an undergraduate or graduate degree. Even $0 payments will count toward the total repayment term requirement.
Unlike Public Service Loan Forgiveness (PSLF), you may have to pay taxes on the forgiven amount. However, Congress recently passed a law eliminating taxes on all loan forgiveness programs until 2025, and some experts believe this could pave the way for more tax-free IDR loan forgiveness in the future.
IDR plans are better for most borrowers than extended or graduated repayment plans because they offer some sort of loan forgiveness. Borrowers may have to convert their loans into a Direct Consolidation Loan to qualify for an IDR plan.
Research Deferment or Forbearance
If you truly can’t afford your federal student loan payments, even on an IDR plan, consider applying for a federal student loan deferment or forbearance program. Although blanket federal student loan forbearance may not be extended, you may be able to pursue this as a secondary option.
The main difference between the two programs is that interest will not accrue during deferment if you have subsidized student loans. Interest will accrue on unsubsidized student loans for both deferment and forbearance.
There are multiple types of deferment and forbearance options. You can find a complete list of deferment programs here and a complete list of forbearance programs here. Once you’re ready to apply, contact your loan servicer and state which deferment or forbearance program you’re interested in.
Get a Loan Payment Refund
If you made any federal student loan payments after March 13, 2020, you may be eligible to have those payments refunded to your bank account. There is no fee or penalty for this refund and no limit on how many payments you can have refunded.
Call your loan servicer’s customer service department and ask them to refund your payments. If you have multiple different loan servicers, you’ll have to contact each one separately. Ask the representative how long it will take to process the refund, and set a reminder in your phone or calendar to verify that the refund has gone through. Follow up with the loan servicer until the money has been posted in your account.
Refinance Student Loans
If you have private student loans, consider refinancing them to lower your interest rate, monthly payment or both.
If you can’t afford to repay your federal and private student loans simultaneously, you may be able to refinance your private loans to get a longer repayment term. Although you may pay more in interest over time, you can likely lower your monthly payments, which can free up some room in your budget.
Refinance your student loans with ELFI and receive access to a personal loan advisor who will guide you through the process.* They can help you with the process of refinancing your student loans and answer any questions you have along the way.