How to take advantage of the new student loan freeze

If you have federal student loan debt, you now have about four months to prepare to start paying off that debt again. In August, President Joe Biden’s administration announced it was extending the moratorium on federal student loan repayments until January 31, 2022.

This means that payments will only resume next year and interest rates will stay at 0%. The latest extension comes shortly after two-thirds of borrowers said it would be difficult for them to pay if they resumed the following month, according to a recent survey by The Pew Charitable Trusts.

“What a fantastic opportunity for borrowers to take better control of their finances,” says Laurel Taylor, CEO and founder of FutureFuel.io, a student debt repayment platform. “It will be almost two years of suspension of payments as we look to January 31. I would really encourage borrowers to maximize this opportunity – whatever that means to them.”

The freeze on federal student loan payments was originally scheduled to expire at the end of September. This latest expansion will be the “final,” according to a statement from the US Department of Education.

This means that any student loan debt you had before the COVID-19 pandemic will be waiting for you when repayment begins at the end of the forbearance period, unless the policy changes again. Experts say you shouldn’t count on your debt going away in the meantime, as there’s unlikely to be a large forgiveness of student loans, not even the $ 10,000 Biden pledged during the campaign. ‘that is to say.

“I don’t see $ 10,000 coming in student loan forgiveness. I just don’t think he can legally without Congress, ”says Robert Farrington, founder and CEO of The College Investor, a site providing advice on student loan debt. “But I think he can do a lot of good with the powers he has, like reforming programs that already exist.”

What to do in light of the extension of Biden’s student loan relief

With this latest update, maybe it’s time to rethink your student loan repayment strategy. Keep in mind that everyone’s situation is different, but here’s what you should do in light of the extended student loan repayment freeze, according to experts we spoke to.

If you have experienced a job loss or a drop in income

Use this time to give yourself leeway to address other financial priorities. If you are unemployed or if your income has declined in the past year, continue to focus on your necessary expenses, such as rent or mortgage payments, utilities, groceries, transportation, etc.

“This relief is for people who have experienced a job loss or a drop in income. I advise them to focus on the necessary living expenses and try not to have that guilt or worry about putting money aside for student loans because this time is for you, ”says Cindy. Zuniga-Sanchez, personal finance coach and founder of Zero-Based Budget, a financial education platform on Instagram.

Another thing you can do to lower your monthly payment when it is due is to request an income-tested refund. An income-based repayment plan is a monthly payment based on your family size and a percentage of discretionary income. If you earn less than 150% of the federal poverty line, your payments could be as low as $ 0.

To register, go to this federal student aid page and click on “Connect” at the top to initiate a request. If you’ve already enrolled in an income-oriented plan and your income has changed, ask your lender to recertify your income before resuming payments. If you make all of your payments on time, an IDR plan allows your loans to be canceled at the end of the repayment period, even if they are not fully repaid.

If you’re not sure what the best repayment option is for you, contact your lender for help or go to studentaid.gov.

“Keep in mind that your payments may not cover the interest that accumulates on your loan, which means you could end up paying a significant amount of interest,” says Zuniga-Sanchez. “I would like to caution this because it is very important to be informed when we make these changes to our student loan repayment strategies.

If you still have a job or income

You can use those extra months to divert money to building an emergency fund or to pay off more urgent high interest debt, such as credit cards or private student loans.

“No one should be paying extra payments for their loans right now. Even if you can, you should save that money and eliminate other debt, ”says Farrington.

If you haven’t already, prioritize building an emergency fund first. Try to set aside three to six months of spending, but don’t feel overwhelmed if saving so much seems like an unattainable goal right now. Start small and go from there. Next, focus on paying off the high interest debt – these strategies can help you do just that. You can also use additional funds to invest in retirement accounts, such as a 401 (k), IRA, or Roth IRA, or to pay off any low-interest debt you may have, such as medical debt. or a car loan.

If you want to pay off your student loans during this 0% interest period, Farrington suggests putting that money into a savings account and then making a lump sum payment right before the payments start again.

“That way you keep that money for as long as you can,” he says.

If you are behind on student loan payments

Because all collection activity will resume once the extension is over, try to rehabilitate your loans as soon as possible. Defaulting on federal loans occurs when a payment is 270 days past due, sending your loans to collections and exposing you to damaged credit, foreclosed wages, and foreclosed tax refunds.

“Get out of default so that as payments and collection activities resume, you don’t have to have your wages or taxes garnished,” says Farrington.

To rehabilitate your student loans and get out of default, you will need to contact your loan manager, complete an application, and follow a specific process. If your application is approved and you make nine payments on time, even during this forbearance period, your loans will usually be transferred to a new loan department and you will be cleared.

If your loan reclamation is not possible for you at this time, there is an additional deferment and forbearance outside of COVID-19 relief that may give you more time to get back on your feet. For example, there’s the postponement of unemployment and the postponement of economic hardship, both of which temporarily suspend your student loan payments. But these options should be your last resort.

The bottom line

If you’re in the majority, you probably haven’t made a student loan repayment in almost two years. Even though the forbearance period has been extended, now is a great opportunity to review your finances and make a plan for resuming payments next year.

For example, you may need to reduce or readjust some spending areas now, so that you have room in your budget in 2022 when payment is due. Based on the most recent announcement, it’s safe to assume that student loan payments will resume in 2022, and it’s best to get ahead while you can.

“Two years of suspension of student loan payments is unprecedented,” Laurel says, “and it’s an opportunity for borrowers to move forward. “