While recent events have provided some breathing room, federal relief measures for student loan debt payments are slated to expire this coming fall and, without an extension, millions of borrowers will be forced to resume making payments beginning in October 2021.
Amid the uncertainty and the ongoing COVID-19 pandemic, however, there are steps that some borrowers could take now to prepare. These include:
Such options may not be available for all borrowers. Still, they are worth investigating.
Pandemic relief fading
Following the COVID-19 outbreak and the resulting economic downturn, payments and interest on all federal student loans were temporarily suspended under the relief program outlined in the CARES Act. That allowed some 40 million student borrowers to pause their payments without interest on federally-held student loans, including Federal Family Education Loan and Direct Loan programs, during the COVID-19 crisis.
While that relief did not extend to privately financed student loans, nine states worked with private loan institutions at the time to establish a voluntary relief program.1 This program allowed borrowers to suspend their payments for up to 90 days without late fees or credit repercussions.
Taking relief measures further still, the Department of Education in March 2021 suspended collections on defaulted federal student loans held by 1.14 million students who borrowed under the Federal Family Education Loan Program and later defaulted.
FFEL loans, which are guaranteed by the federal government but held by private lenders, were not included in the initial COVID-19 relief program. As a result, borrowers who fell behind on their FFEL payments during the pandemic were still being subjected to wage garnishment and collections.
Student loan relief programs have given substantial breathing room to millions of borrowers, but it remains unclear how long that reprieve may last.
Originally, the temporary suspension of student loan payments on federal loans was due to expire September 30, 2020. However, President Trump signed an executive order in August 2020 to extend the federal relief until the end of the year.
In early December 2020, that relief was extended to the end of January. Then, upon assuming office, President Biden ordered relief extended through September 2021. The White House in August 2021.extended the pause yet again on federal student loan payments until January 31, 2022, calling it the "final extension."
If the relief package for student borrowers is not extended further still, student loan repayment obligations would resume thereafter.
Given that the economy is still vulnerable and unemployment remains high, a substantial number of those borrowers may still have a difficult time making those payments beginning this fall and may default as a result.
Default can be costly
Default can have dire long-term financial consequences. For starters, it will damage your credit score, which means you are more likely to pay higher interest rates on credit cards, home and auto loans, and other forms of consumer credit. According to the U.S. Department of Education, you may also have trouble:2
- Signing up for utilities.
- Securing homeowner’s insurance.
- Obtaining a cell phone plan.
- Getting approval to rent an apartment (since credit checks are generally required).
If your credit score sinks low enough, you may be ineligible to borrow at all until you pay off your debt and raise your score. Negative payment information (such as collections and late payments) remain on your credit report for seven years, while Chapter 7 bankruptcies remain for up to 10 years.3
In the case of federal student loans, a default can also result in wage garnishment, collection fees, and future income being withheld from tax refunds and Social Security. The entire unpaid balance of your loan and any interest you owe would immediately become due (called acceleration), you would no longer receive deferment or forbearance, and you would lose eligibility for other benefits, including the ability to choose a repayment plan, the Department of Education reports.
It is important to note that Congress and various states are currently debating extending their student loan relief programs or implementing other types of financial support. Given the political polarization of the upcoming election season, the outcome of any initiatives is in question. Counting on such relief is unwise.
Negotiating with lender
Lenders, who would prefer to have the loans they extend paid back rather than go into default, will often work with distressed borrowers to allow for the repayment of a loan on different terms.
In the case of the federal government, various programs allow for deferment or changing repayment schedules depending on the type of loans. Income-driven repayment programs are also available, which cap payments based on the borrower’s income and family size.
For private student loans, the terms are set by each individual lender. But many lenders will negotiate interest and repayment options if approached. Leniency often depends on the borrower’s income and repayment history.
While refinancing a student loan does not eliminate the principal debt obligation, it can make repayment more manageable and chip away at the interest expense. That’s because refinancing amounts to essentially taking out a new loan to repay your old loan, but at a lower interest rate. And a lower interest rate can mean substantial savings over time.
Indeed, with interest rates over the last few years at historically low levels, many refinancing institutions are offering rates either directly or through various programs that can be particularly attractive for certain student borrowers. (Check out a preferred rate discount through MassMutual's program with CommonBond.)
Additionally, some refinancing companies will allow borrowers to “lock in” a rate quote, much like a mortgage. That gives a borrower time to consider the option and, in the case of the current climate, see if Congress takes action.
“We think it's important to check out your options for refinancing now before federal relief ends,” said Robb Granado, president at CommonBond. “CommonBond can lock in your rate without impacting your credit. You will then be ready to finish up your application and be ready when the federal programs ends. There's really no downside to getting started now.”
Be aware that refinancing could alter the repayment terms for individual loans, depending on the type of loan you have. So understanding the terms of your student loans as well as the refinancing possibilities is critical. (Related: Understanding student loan refinancing)
Many companies offer student loan repayment assistance as part of a benefits package. In fact, such programs are becoming a popular recruiting and retention tool for some industries. And it can potentially save you serious money.
Ask your human resources department if your employer has such a program and, if so, what the terms are. Oftentimes, such programs are only available after a certain period of employment or may have been implemented after you signed on. If no program exists, you may want to ask your employer whether such a program could be considered or whether help might be provided on an individual basis.
The current economic crisis has led to potential problems for millions of student loan borrowers. Government relief has been helpful, but its continuation is not certain. Borrowers should therefore consult their lenders, consider refinancing, and review their employee benefits to forestall negative consequences as much as possible.
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This article was originally published in January 2021. It has been updated.
1 The nine states are California, Colorado, Connecticut, Illinois, Massachusetts, New Jersey, Vermont, Virginia, and Washington.
2 U.S. Department of Education, “Student Loan Delinquency and Default.”
3 Bankrate, “How long does it take to raise your credit score?” Dec. 13, 2019.