What Can Student Loan Borrowers Do When The Payment Pause Ends
The payment pause and interest waiver in the CARES Act, passed in March, suspends the need to make payments on certain federal student loans, through September 30, 2020. What happens when the payment pause ends and borrowers still don’t have jobs? Are there any other options for financial relief besides the payment pause?
The Future of the Payment Pause is Uncertain
There are a few proposals to extend and expand the payment pause and interest waiver, but it is unclear whether any of these proposals will be enacted.
The Heroes Act will extend the payment pause and interest waiver for a year, through September 30, 2021, and expand the payment pause and interest waiver to cover all federal student loans and private student loans. The Heroes Act passed the U.S. House of Representatives on May 15, 2020 but is stalled in the U.S. Senate.
The Student Loan Fairness Act (S. 4237) expands the payment pause and interest waiver to cover all federal student loans, including all loans in the Federal Family Education Loan Program (FFELP), but does not extend the relief beyond September 30, 2020. This legislation has bipartisan support, but has not been reported out of committee.
The Economic and Student Loan Debt Relief Act of 2020 (H.R. 7114) extends the payment pause and interest waiver through December 31, 2020. It also makes permanent the exclusion from income for employer-paid student loan repayment assistance. This legislation has bipartisan support, but has not been reported out of committee.
Options for Student Loan Relief after the Payment Pause Ends
There are several existing programs that can provide borrowers with student loan payment relief after the payment pause and interest waiver expires.
Economic Hardship Deferment. The economic hardship deferment provides a payment pause for federal student loan borrowers who are experiencing severe financial difficulty. It is available to borrowers who are receiving federal or state public assistance and to borrowers who are working 30 or more hours a week but earning less than 150% of the poverty line. The economic hardship deferment is available for up to a total of 3 years. The federal government pays the interest on subsidized loans, but not unsubsidized loans during an economic hardship deferment.
Unemployment Deferment. The unemployment deferment provides a payment pause for federal student loan borrowers who are unemployed and actively looking for but not finding full-time work. Borrowers who are receiving unemployment benefits are also eligible. The unemployment deferment is available in 6 month increments for up to a total of 3 years. The federal government pays the interest on subsidized loans, but not unsubsidized loans during an unemployment deferment.
Forbearances. Forbearances provide a payment pause on federal and private student loans. Borrowers who don’t qualify for a deferment may be able to qualify for an economic hardship or unemployment forbearance. For example, if federal student loan payments equal or exceed 20% of the borrower’s monthly income, they may qualify for a forbearance. In addition to full forbearances, which suspend all payments, private student loans may also offer partial forbearances, which involve interest-only payments. Federal forbearances are limited to 3 years in total duration. Private student loans offer forbearances in increments of 2-3 months, not necessarily consecutive, for a total duration of 1 year. The federal government does not pay the interest on any student loans during a forbearance.
Income-Driven Repayment Plans. If a borrower’s income is less than 150% of the poverty line, their monthly federal student loan payment may be zero under an income-driven repayment plan. There is no time limit on having a zero monthly payment under an income-driven repayment plan. The federal government pays the accrued but unpaid interest during the first three years of some of the income-driven repayment plans. There are other important differences between the four income-driven repayment plans.
Other Options for Student Loan Relief
In addition to the income-driven repayment plans, there are also extended repayment plans that reduce the monthly loan payment by increasing the term of the loan. Depending on the amount of debt, you may be able to get a repayment term on your federal student loans of up to 25 years without consolidation and 30 years with consolidation.
Before you skip a payment on your student loans, look on the lender’s web site for information about options for financial relief. Then, contact the loan servicer to tell them about your financial challenges and ask which options are available to you.
Whatever you do, don’t default. You lose options, such as deferments and forbearances, if you default first. The wage garnishment amount is usually higher than the monthly payment under an income-driven repayment plan. Plus, if you default, you’ll have to pay late fees and collection charges that will slow progress in paying down the debt.
Also look into loan discharge and forgiveness options. If you are unable to work because of long-term side effects of a COVID-19 infection, you may be able to qualify for a disability discharge of your student loans.