During the pandemic, the government took some actions to help student loan borrowers. One of those actions involved the CARES Act, which utilized more than $2 trillion to stimulate the economy. The Trump administration also granted a deferral period to student debtors through this act. In the deferral period, the lenders stop collecting the debt payments.
As many people were unable to generate adequate income during the lockdown, such a non-collection period was essential for the borrowers. The first deferral period covered the period from September till December end, 2020. Next, this benefit was extended till the end of January.
Details of the Decision
Some people were worried that they would be obliged to start repaying the student debt once January ends. However, great news came from the Biden administration.
The president announced taking actions to relieve American families, and he did immediately what he promised. On his first day of presidency, January 20th, Joe Biden requested the Education Department to extend the student loan deferral period for 8 months. Such a long period of non-collection created a huge excitement because many expected a maximum of three months extension.
Based on Biden’s request, the Education Department extended the deferral period. The department mentioned that during these times, many families struggle to make a living. Hence, they do not want to pressure such borrowers to choose between debt repayment and food expenses.
As a result of the requested pause on student debt collection, more than 40 million people in the U.S will benefit.
What does Extension Mean for Borrowers?
This news means that student loan borrowers are not required to make payments for their student loans till September end, 2021. However, if they choose to continue repaying the debt or make one-time payments, they can do it and save money on interest by decreasing the original balance.
During the period of non-collection, the loans will not accrue new interest payments. It means the interest rate is temporarily set to 0%, and non-payments will not bring penalties to borrowers. Even if the loan is in default, it will still benefit from this period. Yet, the borrowers need to note that the suspension period only applies to federal loans managed by the government, such as Direct and the PLUS loans. Some loans are guaranteed by the government but held by universities or private companies. Such loans were mostly disbursed before 2010, and they are out of the coverage of this suspension decision. Around 15% of federal loans will not benefit from the Biden administration’s decision.
The suspension will happen automatically, which means borrowers do not need to take further actions to utilize this benefit.
What about the Public Service Loan Forgiveness?
The Public Service Loan Forgiveness program allows borrowers to get rid of their debts after making 120 qualifying payments. Currently, many people working in public sectors try to complete these payments to utilize the forgiveness benefit. Such a period of non-payments might worry them.
However, borrowers should be aware that this suspension period does not create a problem for their progress toward the PSLF. Each month still qualifies for the payment for the PSLF. Additionally, the period will still qualify for a student loan rehabilitation program. This program erases the negative effects of default after making 9 payments consecutively.
Further Implications of Suspension for Government
Sure, the suspension period is necessary to facilitate more than 40 million student loan borrowers during economically challenging times. However, another reason for granting non-collection status to borrowers is that it will give the government some time to think about further actions.
When natural disasters happen, such as Hurricane Harvey, student loans’ default rates increased immediately after the event. Hence, the officials are also worried that if they resume the collection process without careful planning, many borrowers will be unable to repay the debt. Therefore, again, the default rates will spike, which is not desirable. Rather than pressuring the borrowers into repaying the debt, the government should find an easy and smooth way of transition to start the repayment process. Reasonably, they need some time to settle and develop error-free for millions of borrowers.
What about Debt Cancellation?
After the tweet of Biden back in March, some people started hoping for direct and immediate debt cancellation, around $10,000 per borrower.
Progressive Democrats argued that such relief is necessary to facilitate borrowers during economic hardships and close the wealth gap for different races. On the other hand, Secretary Betsy DeVos expressed arguments against this claim and viewed this benefit as “gift-giving.”
In his first relief plan that Biden proposed, he did not cover any student debt cancellation. However, Brain Deese noted that Biden continues supporting this idea. Hence, he might include debt cancellation in the following relief plan.
It might also be possible that student loan cancellation will not be granted, at least during the suspension period. During these 8 months, the Congress and the Biden administration will have time to think on the idea of forgiveness per borrower.
Do You Want to Eliminate Student Loan Debt?
8 month period is not only useful for the government to develop future plans but also beneficial for the borrowers to think about the future of their debt obligations. If till now you did not have time to search for your debt resolution alternatives, the suspension period is a great opportunity. Get familiar with many forgiveness or discharge options that can save you from repaying the debt.
Unfortunately, private student loan borrowers cannot benefit from many programs that are available to federal borrowers. However, there are a few opportunities like refinancing, consolidation, or debt settlement for such debtors.
If you cannot decide which program to apply to or, in general, which programs are available, contact our debt specialists. We can choose the most suitable option for eliminating your debt obligations in a short period.