What You Need To Know

getty For much of 2020, millions of student loan borrowers have not had to repay…

For much of 2020, millions of student loan borrowers have not had to repay their federal student loans because of emergency pandemic relief. That relief is expiring soon.

Congress passed the CARES Act in April in the wake of the rapid economic collapse brought about by the Covid-19 pandemic. Although the implementation of the CARES Act has been messy, the CARES Act provided substantial relief to student loan borrowers. The stimulus bill suspended payments, interest, and collections on all government-held federal student loans through September 30, 2020. President Trump subsequently extended that relief to December 31 through executive action.

House Democrats have been pushing for a further extension and expansion of the pause in student loan payments, interest and collections. The House passed the $3.4 trillion HEROES Act in May, which would have extended the CARES Act’s student loan relief by a full year to September 30, 2021, and expanded that relief to include commercially-issued FFEL-program federal student loans and Perkins loans, which had been excluded from the CARES Act. The bill also included $10,000 in federal and private student loan forgiveness for borrowers experiencing economic distress. However, Senate Republicans have repeatedly rejected the HEROES Act, and there are few (if any) signs that a new agreement will be reached between Congress and the White House by the expiration of relief on December 31.

That means that millions of student loan borrowers will start getting billed in January for their student loans for the first time in nearly a year, and borrowers in default will again be subject to collections efforts as well as wage garnishments, tax refund seizures, and offsets of Social Security benefits.

If Congress does not act, and you can’t afford your payments in January, you may still have some options.

Deferment and Forbearance

Deferments and forbearances are programs that allow borrowers to pause payments on their student loans but remain in good standing during times of economic hardship. In general, federal student loans have significantly more generous payment deferral options than private loans; you may have several years of economic hardship deferment or forbearance available over the course of a federal student loan’s repayment term, compared to a year or less for private loans. 

Typically, interest still accrues on all student loans during a deferment or forbearance, except for certain subsidized federal student loans. And that interest can periodically capitalize — meaning it would be added to the principal loan balance. This can lead to significant balance increases over time, which borrowers should be aware of.

Switch to Income-Driven Repayment

Income-driven repayment programs are available for many federal student loan borrowers. Borrowers can repay their loans using a formula applied to their income, and their payments get recalculated annually. If the borrower stays in the program long-term, they may eventually be eligible for loan forgiveness if they have not paid off their loans in full (although this could potentially be a taxable event at the end).

Federal student loan borrowers who are currently not in an income-driven plan can apply to switch into one of these plans due to changed circumstances (such as job loss or a decrease in income). Income-driven repayment programs may be better solutions in this type of hardship situation than a deferment or forbearance, since the plans are renewable year after year. Furthermore, most of these programs allow borrowers to pay nothing on their student loans for up to 12 months if they are earning less than 150{a25bda0f8ab6dac90e68079d6f038584ef6ac53f1f4621de3ad526e35cd6c0d6} of the poverty limit for their family size.

You can apply for income-driven repayment online.

Recalculate Payments Under an Income-Driven Repayment Plan

Student loan borrowers already on an income-driven plan can request a recalculation of their monthly payments at any time due to job loss or a reduction in income. So if your monthly payment is based on your outdated income information or last year’s tax return, you can submit a new application now to recalculate your monthly payments based on your current financial picture. Recalculating your payments may be preferable to going into a deferment or forbearance because it keeps you on track for eventual loan forgiveness and avoids other negative consequences of leaving the program, such as interest capitalization.

You can apply for a recalculation of your income-driven payments here.

Hardship Modifications for Private Student Loans

Private student loans generally have fewer options than federal student loans do during times of hardship. There usually is no income-driven repayment program, and deferments and forbearances are much more limited.

However, some private student loan lenders will temporarily modify and reduce monthly payments based on financial hardship. These modification programs are largely discretionary, which means that most borrowers do not have a contractual or statutory “right” to a change in their their loan terms; rather, the lender gets to decide whether or not to allow a reduction in payments. In some cases, a temporary reduction in payments may lead to higher payments later when the temporary modification ends, so make sure you understand the terms and consequences of your modification.

Get Out of Default

Borrowers in default on their federal student loans may soon be facing wage garnishments, tax refund seizures, and offsets of federal benefits like Social Security. However, there are federal statutory programs that can allow borrowers to get out of default and return to regular repayment. Rehabilitation, for instance, is a temporary payment program tied to the borrower’s financial circumstances that can allow borrowers to cure their defaulted loans and start repairing their credit. Direct loan consolidation through the U.S. Department of Education can also provide a path out of default. Once the student loan has been restored to good standing, borrowers can access programs like deferments, forbearances and income-driven repayment.

Borrowers in default on their student loans should consider taking steps now to resolve their defaults prior to collections resuming in January, which in some cases makes it harder or more expensive to get out of default.

Contact Your Elected Officials To Extend Student Loan Relief

Borrowers can contact their elected officials and ask that they pass legislation extending the CARES Act’s student loan relief provisions. Find your congressperson here.

Further Reading

Trump Includes Student Loan Forgiveness In Latest Stimulus Proposal, Signaling Its Broad Appeal

Biden Affirms: “I Will Eliminate Your Student Debt”

Biden’s Income-Based Student Loan Plan Would Dramatically Lower Payments For Some — Here’s How

How “Cancel Student Debt” Went From A Fringe Idea To Mainstream

Elizabeth Warren And Chuck Schumer: The Next President Must Cancel Student Debt Without Congress