With every news popping up, new expectations are formed for the student loan forbearance. Forbearance was granted back in March 2020 to help borrowers struggling with federal loan repayment due to the pandemic. First, the Trump Administration and then the Biden Administration extended this status for 18 months. Hence, forbearance should end in September.
Yet, we do not lose our hopes that forbearance will be extended. Many groups of supporters- 128 organizations, 64 Senates, and some others, support the extension of student loan forbearance. They mainly note that borrowers are not ready for repayment yet.
This guide will discuss the latest updates on loan forbearance due to the COVID-19 pandemic and suggest a future path for borrowers.
Student Loan Forbearance due to COVID-19 Pandemic
As borrowers struggled with the economic challenges of the COVID-19 pandemic, the government took action to help such individuals. The CARES Act was designed, which involved a $2.2 trillion economic stimulus package in bringing different benefits to individuals, including temporary debt non-repayment.
Under the act, the federal student loan borrowers did not need to make any payments for their loans, and no interest would accrue during this period. In other words, interest was set to 0%. Besides, the collection of defaulted loans stopped.
First, President Trump prolonged the effective date of this act from October to January end, 2021. Next, in January, Joe Biden started his presidency, and as one of his very first actions, he extended student loan forbearance due to the COVID-19 pandemic till September end. At that time, this action created a huge reaction because none expected the 8-month long debt non-repayment period to be granted.
Based on the last decision of January, the debt repayment will assume in October. So now, the most crucial question is whether Biden will prolong the non-repayment period further.
Education Department Secretary’s Hints
As people lost their expectations on extension, there emerged a new glimpse of hope due to the speech of Education Department Secretary Miguel Cardona. In May 2021, Cardona said that there was no decision regarding extension, and they are checking data to see if the economy recovers from the pandemic and resuming debt collection is possible. However, he also added that the cues at that point showed the end of student loan forbearance in September.
After these notes, people had no other expectation of extension. However, hopes are again rising due to new comments from the Education Secretary. In his speech on Capitol Hill, Miguel Cardona mentioned that they are still having “continuing conversations” on possible student loan forbearance extensions.
He also added that they are checking if October is the right time to resume debt repayments. Sure, he did not precisely say that the extension will be granted, but even its possibility discussion created hopes.
Senators’ Response to Extension Possibility
More than 60 U.S Senators are in support of student loan forbearance extension beyond September, and they sent a letter dated June 23, 2021, to the President. In the letter, the Senators, including Elizabeth Warren and Chuck Schummer, explain four significant drawbacks of resuming debt repayments in October. According to the letter, non-extension would cause:
- Massive loan defaults on student loans
- Slow down of Economy
- More significant Impact due to wrong timing
- Dissatisfaction with the loan servicers
Now we will look at each scenario in detail to understand what will happen if student debt repayment is resumed in October.
1. Massive Defaults on Student Loans
The Senators noted that more than a million borrowers defaulted each year before the COVID-19 pandemic. In addition, the financial situation of many borrowers got even worse due to losing employment opportunities during the pandemic. Hence, Senators expect more borrowers to become unable to repay their debt immediately in October.
2. Slow Down of Economy
Another negative consequence of the non-extension of student loan forbearance will be the economy slowing down. According to the letter, borrowers have less money, and if they pay loan repayments, they will be left with little to no discretionary income. Having less willingness to spend discretionary income will hurt local economies.
On an aggregate level, the Impact will be a wide-scale damaged economy. Senators believe that if debt repayment is suspended further, people will have more income to spend during the pandemic recovery period. Therefore, this process will pump up the economy.
3. More significant Impact due to Wrong Timing
Senators are worried about the bad timing of debt repayments as the federal moratorium on foreclosures and evictions is ending. In such a case, 8 million households could deal with foreclosure/eviction. It should be mentioned that this moratorium was initially due on June 30, 2021, but it was prolonged by one more month till July end. Yet, it does not change the fact that many borrowers could be households facing negative consequences due to the expiration of this moratorium.
Additionally, unemployment benefits will expire in September, leaving borrowers in even worse situations. So now the problem is not only repaying the debt but doing so while losing unemployment benefits and facing foreclosure/eviction decisions.
4. Dissatisfaction with the Loan Servicers
Another issue concerning Senators is that loan servicers are not prepared to deal with borrowers after a pandemic. Even before the pandemic, loan servicers misled borrowers and did not show the necessary support. The Senators worry that misleading activities of loan servicers could hurt borrowers even more.
Who Else Supports Extension Plan?
Besides a group of Senators, Chairs of Senate and House Education Committees Patty Murray and Bobby Scott support the extension decision. They also wrote the President to request student loan forbearance for a limited period beyond October, such as till the beginning of 2022.
They based their request on the idea that the Education Department is not ready to resume payments. Besides, they added that the department needs some more time to do necessary research to coordinate with borrowers and inform them about their upcoming obligations.
Additionally, they noted that although the economy is recovering, more than 9 million unemployed people still exist due to pandemic consequences.
Another group of advocates consists of 128 organizations that want student loan forgiveness. These organizations include American Civil Liberties Union, Service Employees International Union, etc.
In their letter to the President, they ask for forbearance until the President grants loan cancellation. They noted that it is a great time to fix issues with the damaged student loan system, and these issues should be addressed first before resuming debt repayments.
Elizabeth Warren’s Concerns on Loan Servicers
Elizabeth Warren supports the idea that loan servicers are not prepared to resume debt repayments. Previously, Warren, together with some other Senators, sent questions to loan servicers to check their preparation level. They contacted important servicers, like Nelnet, Navient, and Pennsylvania Higher Education Assistance Agency. The loan servicers explained their record tracking, training process, and commitment in a written way. Some of them added that they are going to hire new employees to support operations.
However, what worries loan servicers the most is the uncertainty. Less time is left till September end, and they still do not know if the debt repayment will resume. Such delay does not let them design proper plans.
Warren noted that neither borrowers nor loan servicers is prepared to resume debt repayments based on the responses collected. Warren and other Senators believe that some more time is needed to coordinate communication among the Education Department and loan servicers to clarify procedures.
What is the Issue with Resuming Debt Repayment?
Loan servicers indicated that their task is unprecedented. They never dealt with resuming more than 43 million accounts at the same time. What makes the situation even worse is the lack of time. Days pass, and the Biden administration still does not make any decision whether to stop the student loan forbearance. Hence, loan servicers face a lack of time for a smooth transition.
For and Against Arguments
Let’s quickly summarize arguments for and against student loan forbearance extension decisions to see how likely the decision is.
Supporting Extension of Non-Repayment Period
- The pandemic has not entirely ended yet
- Millions of borrowers still have financial struggles
- The Negative Impact of the pandemic on the economy is not eliminated
- 90% of borrowers are not ready for repayment, according to Student Debt Crisis
- Repayment will hurt people of color and low-income individuals with no employment more
- Debt repayment will leave little money to spend to empower the economy again
Opposing Student Loan Forbearance Extension Idea
- In September, it will be 18 months long forbearance period (since March 2020) which is long enough
- If borrowers do not repay the debt, it is a burden on taxpayers
- Borrowers are expected to get $90 billion worth of forgiveness till September
- If the Biden administration believes the economy is recovering, stopping debt repayment will go against this belief
- There exist no distinction between who can repay and who cannot
What Should Borrowers Do?
The Education Department might extend the student loan forbearance, but borrowers should be ready for the worst-case- resuming debt repayments in October. Therefore, if you have a student loan, you need to ensure that you have enough money to afford student loan payments in advance. Talking to a student loan servicer is also a good idea to understand your options. They can help if the borrowers still have financial struggles.
Additionally, it is expected that Biden will grant more forgiveness options, and you might end up debt-free till October. However, as said, be prepared for the repayment. If you do not have the necessary funds, you can benefit from debt repayment strategies, like Student Loan Refinancing, Income-driven Repayment plans, and Forgiveness options.
Things to Know before Debt Repayment
Let’s assume the worst case- the student loan forbearance ends, and repayment begins in October. We know that you will have many questions to be answered as soon as repayment starts. In this section, we will clarify some issues to make you prepared for the repayment.
When Should I Make Payment?
If debt repayment is resumed in October, you will be required to make your monthly student loan payment on federal student loans. The exact date of payment depends on your loan agreement. You can contact your loan servicer to get more information.
Will Interest Rates Change When Repayment is Resumed?
In July 2022, the federal student loan rates increased for new student loans. Keep in mind that this increase does not apply to your existing loans. Besides, during the forbearance period, the interest rate was set to 0%, which means no interest payments accrued that could possibly increase the monthly payment amounts.
In short, you should be paying the rate you had back in March 2021. If you notice a change, contact your loan servicer to check.
Is There Any Change on Private Loans?
Private student loans were outside of the scope of student loan forbearance. In other words, during the pandemic, the private loan collection continued in its normal course. Hence, the President’s actions and decisions on forbearance do not impact private loans in any way. Yet, you can check your new loan rate if you have variable-rate loans.
Will My Student Loan Servicer Change?
Your student loan servicer should remain the same as before the pandemic in the normal course of action. Yet, as said, loan servicers would face many challenges if repayment resumes. Hence, changes might be expected. However, do not worry about this issue, as you will be informed about any changes before they happen.
How Will I Know if Repayment is Resumed?
Whether the Education Department extends student loan forbearance or stops it, they will communicate the decision to the borrowers. If the debt repayment is resumed, they will more likely send written notices to borrowers to inform them about upcoming obligations. Yet, it is advisable to follow news and updates to be one step ahead.
Should I Change the Repayment Plan?
It is almost the final call to review your debt repayment strategy because, for now, you do not need to repay the debt. Check different repayment plans and see which one suits your needs the best. If you have financial struggles, moving to one of the Income-Driven repayment plans, such as Revised Pay as You Earn or Income-Based plan, can be a good idea.
Besides, it is advisable to update information on your earnings and family size as they might have changed during the 18 month long non-repayment period.
Do I Get Credits for Forgiveness even if I have Made No Payments since March?
The student loan forbearance period is not a barrier to earning credits for forgiveness programs. Programs like Public Service Loan Forgiveness or debt elimination due to Income-Driven repayment plans require some number of months with debt repayments.
So even if you have made no payment since March, you have 18 months’ worth of credit as if you made all payments on time.
Will My Loans get Cancelled?
Biden has distributed many loan forgiveness options since he started his presidency. In total, he canceled around $3 billion student loans since January. However, student loan cancellation and loan forbearance are two separate issues. There is no guarantee that if Biden canceled loans, he would also extend the forbearance.
Keep in mind that he already granted the last extension for the federal moratorium on foreclosures and evictions. If he canceled these benefits, he could stop forbearance as well.
Will There be an Extension of Forbearance Status on Student Loans?
The question remains whether the student loan forbearance will be extended after September. Some groups of individuals and organizations, such as more than 60 Senators, including Warren and Schumer, and more than 128 organizations support the extension. They have already communicated their thoughts and arguments to the President through letters. However, the President already granted $3 billion forgiveness. Besides, he noted that the economy is recovering and eliminated benefits such as stopping foreclosures and evictions which were granted due to the pandemic. Hence, we can expect that the loan forbearance will not be extended further. Yet, follow our blogs or news to get informed about any decision on forbearance immediately.
