In one of his first official acts, President Joe Biden asked the U.S. Department of Education to extend its pause on collecting payments on federal student loans through September. Biden framed the break as a financial lifeline for borrowers who have lost income during the coronavirus outbreak.
“The pandemic has only increased the economic hardship of the millions of Americans who have student debt,” the Biden administration said Wednesday in a statement.
The Education Department quickly agreed. The move affects only the $1.5 trillion in federal student loans outstanding. Student loans issued by private lenders aren’t part of the initiative.
If you’re facing financial hardship, take advantage of the break on student loan payments. If you owe credit card debt, for instance, it might make sense to redirect your student loan payments to retiring credit card debt.
But if you’ve got the room in your budget, use this opportunity to reduce your student-loan debt, says Greg McBride, CFA, Bankrate’s chief financial analyst.
“If you’re fortunate enough to be able to continue making payments, it is a great time to make headway on paying down the balance,” McBride says. “Without interest accruing, every dollar you can pay will go toward knocking down your balance.”
Federal relief came quickly
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in March, let borrowers suspend payments on federal student loans for six months, through Sept. 30, 2020, and automatically waived interest. In a further nod to the tough labor market, the Department of Education suspended collection attempts and wage garnishments, Social Security offsets and tax refund seizures against borrowers in default of their federal student loans.
In August, then-President Donald Trump issued an executive order extending many of the protections for borrowers of student loans. Through Dec. 31, 2020, federal student loan payments continued to be suspended, collections were stopped and interest was waived.
Federal student loans
While details of the latest extension were sparse on Wednesday, here’s how the payment pause had worked: The U.S. Department of Education stopped requiring payments, and loans ceased accruing interest.
For more information, check out the coronavirus information page on the Federal Student Aid website.
Private student loans
Private student loans, Federal Family Education Loan (FFEL) Program loans owned by commercial lenders and Perkins Loans held by schools were not eligible for these benefits. If you have a private student loan, your payments and interest will not automatically be waived. You will need to continue making your payments on time or contact your loan servicer about hardship options.
Many private lenders have programs in place to help borrowers affected by the COVID-19 crisis. These programs may include temporary forbearance, deferment or adjusted repayment plans.
How to find loan relief for private student loans
Help for federal student loan borrowers is automatic, so you won’t need to contact your servicer about postponing payments and waiving interest unless you have questions. But every private lender and loan servicer is offering different relief options. Here’s how you can request help:
- Call your loan servicer. When you call or email your loan servicer, explain your financial situation and how you’ve been hurt by this crisis. For example, you or your partner may have been laid off or furloughed, or you might have concerns about your future ability to make your student loan payments. Tell your lender when you anticipate being able to resume loan payments.
- Ask about assistance programs. Your options will depend on the servicer and your individual situation. For example, your loan servicer may offer to suspend payments for a few months, temporarily lower your interest rate or offer interest-only payments. Some servicers are treating each situation on a case-by-case basis.
- Ask questions. Before agreeing to start the program, confirm the exact terms, such as fees involved, how long the relief lasts and whether interest accrues. You also should find out whether that accrued interest “capitalizes,” which means it’s added to the unpaid principal balance. Create a plan for how you’ll resume payments at the end of the forbearance period.
- Enroll in your loan servicer’s program. Ask for the details in writing and complete the process to enroll in your loan servicer’s program. Make sure that you receive confirmation that you’ve been enrolled.
- Consider refinancing. As interest rates drop, it’s getting cheaper to refinance private student loans. Shop around for the best rate if you’re considering this move. Refinancing can help you save a substantial amount of money if you can shave a percentage point or two off your current interest rate. It can also help if the new lender offers more flexible hardship options than your current lender.
Keep in mind that enrolling in plans that suspend or lower payments ultimately extends the life of the loan, which costs you more in interest overall. If you can afford to keep making payments as scheduled, it may be in your best interest to do so.
Also be cautious about refinancing federal student loans into private loans. Wednesday’s headline was just the latest reminder that federal loans carry more generous terms than those issued by private lenders.