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What you need to know about extending the final payment break on student loans

What you need to know about extending the final payment break on student loans

President Joe Biden and Secretary of Education Miguel Cardona.

Washington Post | Washington Post | Getty Images

It’s been nearly three years since people with federal student loans had to pay off their debt, and the Biden administration recently said borrowers have more time.

In March 2020, when coronavirus pandemic In the first blow to the U.S. economy that has crippled the economy, the U.S. Department of Education has suspended federal student loan payments and any interest payments, giving borrowers some extra breathing room during particularly tough financial times.

Account recovery for more than 40 million Americans has proven to be a massive and difficult task, and the payments holiday has now spanned two presidencies and been extended eight times.

Before the public health crisis, when the U.S. economy was going through one of its healthiest periods in history, the federal student loan system was in trouble, with about 25% of its borrowers — or more than 10 million — delinquent or defaulting.

Experts say the challenges will only increase with the setbacks of the pandemic, spikes in the price of everyday goods and borrowers getting used to budgeting without student loans.

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White House officials hoped to ease the transition back to life with student loan payments by first forgiving a large portion of the debt.

Not long after President Joe Biden announced his plan to cancel student loans of up to $20,000 for millions of Americans, a number of conservative groups and Republican-backed states have attacked the policy in the courts. Two of those lawsuits were successful in at least temporarily stopping the aid, and the Department of Education closed the loan waiver application portal this month.

With so much still up in the air, the Biden administration has pushed back the deadline for student loan bills again.

“Without the unjustified lawsuits and special interests of Republican officials, it would be extremely unfair to ask borrowers to pay a debt they don’t have to pay,” Education Secretary Miguel Cardona said in a statement.

Here’s what borrowers need to know about getting more time.

So when will the payments start again?

It’s a bit complicated.

With the previous extension of late payments, the Department of Education has set a date for student loan accounts to resume.

This time, he left things a little more open-ended, saying that the accounts would only resume 60 days after the student loan forgiveness plan lawsuit was resolved and he would start eliminating the debt.

Therefore, if the bills were settled by the end of November, the bills could be paid again by the end of January, but this is unlikely.

If the Biden administration is still defending its policy in the courts by the end of June, or if it fails to forgive student debt, the payments will go up in late August, he said.

So borrowers have a minimum of two months and a maximum of nine months without an account.

What if I fall behind on my student loans?

Do I still have to put the refinance on hold?

Higher education expert Mark Kantrowitz has previously suggested that federal student loan borrowers refrain from refinancing their debt with a private lender despite the possibility of a low interest rate hike, and the Biden administration has discussed moving forward with forgiveness. Refinanced student loans do not qualify for the federal discount.

Now that borrowers know how much loan waivers will cost — assuming the president’s policy holds up in the courts — borrowers may want to consider the option now, Kantrowitz said. With the Federal Reserve expected to continue raising interest rates, he added, you’re more likely to choose a lower rate from your lender now rather than later.

However, Kantrowitz added, it may be a small pool of borrowers for whom refinancing makes sense.

It would be grossly unfair to require borrowers to default on debt without the baseless lawsuits and special interests of Republican officials.

Miguel Cardona

Secretary of the US Department of Education

He said those include borrowers who don’t qualify for Biden’s forgiveness — the plan excludes anyone with more than $125,000 as an individual or $250,000 as a family — and people with a lot of student loan debt. The Biden administration plans to abolish it. Those borrowers may want to consider refinancing a portion of their debt with the discount amount, Kantrowitz said.

Betsy MayotteThe president of the Institute of Student Loan Counselors cautioned borrowers to understand the federal protections they waive before refinancing.

For example, the Department of Education allows you to defer accounts without interest you can prove economic difficulties. The government also offers loan forgiveness programs teachers and civil servants.

“Refinancing can result in lower interest rates than federal student loan rates,” Mayotte said. “But if you lose your job, have sudden medical expenses, can’t pay your bills, and find that default is your only option, your rate doesn’t matter.”

What should I do with the extra money during the break?

Boy_anupong | Torque | Getty Images

With headlines warning of possible bankruptcy and layoffs, experts generally recommend trying to eliminate the money you’re putting toward student loans each month.

There were some banks and online savings accounts raising their interest rates, and it’s worth looking for the best deals available. You’ll want to make sure any account you put your savings into is FDIC insured, up to $250,000. deposit protected against loss.

While interest rates on federal student loans are near zero, it’s a good time to make progress on paying off more expensive debt, experts say. The average interest rate on credit cards is currently high 19%.

Does it still make sense to pay off student loans?

If you have a healthy rainy day fund and no credit card debt, it makes sense to continue paying your student loans even during the break.

When interest is suspended, any payments go directly to your loan principal, which can shorten your repayment period, he said. Anna HelhoskyStudent Loan Expert at NerdWallet.com.

“You can continue to make payments by contacting your servicer each month, or you can save money and make a lump sum payment on your highest interest loan before interest is recalculated when repayment starts again,” Helhoski said.

However, there is a big caveat here. If you are registered income-based repayment plan or harassment public service loan forgivenessyou don’t want to keep paying off your loans.

Because the months in the government’s pay freeze still count as eligible payments for those programs, and because they both lead to forgiveness after a certain period of time, any cash you send to the loan during that period will reduce the amount you ultimately receive. forgiven.

Another option: If you find yourself financially comfortable and continuing to pay off your student loans doesn’t make sense, you might want to donate some extra money to charity.

You can make sure that the organization is reputable using tools like Better Business Bureau’s Wise Giving Alliance or Charity Navigator, – said Khelhoski. You may even be eligible if the charity is registered as a 501(c)(3). tax relief.

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