After multiple extensions, the federal student loan payment freeze and interest waiver is ending on January 31, 2022. Come February, borrowers with federally held student loans will need to resume payment on their loans.
If you’re one of the millions of borrowers impacted by the payment pause, you’re probably wondering what you should do—if anything at all. We recently hosted a webinar where our Head of Operations and Borrower Success Bridget Haile broke down what’s coming, what steps you can take, and what changes warrant your attention.
Back in March 2020, Congress passed the CARES Act to provide relief to individuals and businesses at the onset of the pandemic. The package suspended payments, interest, and involuntary collections on qualifying federal student loans, essentially providing borrowers with a penalty-free break from their student debt.
Initially, Congress only intended for the pause to last until September 30, 2020. But the moratorium was extended several times, with the Department of Education announcing that the final extension would end on January 31, 2022.
What happens in February?
A few things. First, payments will resume, so you’ll return to your pre-pandemic repayment plan and will be expected to make the same payment amount on your due date. If you were enrolled in an auto debit program, your loan servicer may restart those payments automatically at the end of the freeze, too. Second, you’ll no longer be protected from defaulting on your loans if you miss a payment. Lastly, forbearance will no longer count toward forgiveness programs. (Under the CARES Act, suspended payments between March 2020 and January 2022 counted toward forgiveness.)
But you don’t have to wait until February to take action on your loans. In fact, the sooner you enroll in savings and/or forgiveness plans, the better. “Your loan servicer or the Department of Education can take several weeks to process your forms and applications, and we anticipate them being very busy in the lead up to February.” noted Bridget.
What are my options?
It depends on your personal financial circumstances, so let’s take a look at three situations that you may be in with your federal student loans.
1. Lower your monthly payments
If you want a more manageable payment amount for your federal loans, consider enrolling in an affordable repayment plan as soon as possible. Starting this process now can help you resume payments at a lower monthly amount once the freeze ends—which is pretty ideal timing.
Affordable repayment plans fall into two categories: income-driven or not. For most borrowers, income-driven repayment (IDR) plans will provide the lowest possible monthly payment. If you decide to go this route, these are the available plans: income-contingent repayment (ICR), pay as you earn (PAYE), income-based repayment (IBR), and revised pay as you earn (REPAYE).
The good news? You don’t have to spend hours researching these plans to find the right one for you. “Summer has an online income-driven repayment tool that will look at all of your loan details and all of your income details and tell you which of these has the lowest monthly payment for your situation,” Bridget shared. You can also explore your options with our income-driven repayment guide.
Summer users, login to see which solutions are right for you via the My Plan toolbar.
And the IDR plan enrollment process is pretty straightforward. You submit a form along with proof of income (e.g., tax return or pay stub), you receive a monthly payment amount based on your income, and you recertify annually to confirm that the payment is still affordable.
But it’s important to point out that not all federal loans qualify for all IDR plans. If you have Direct Loans, you’re in the clear. However, if you have FFEL and/or Perkins loans, only some are eligible for income-driven repayment; the other loans have to be consolidated into a Direct Consolidation loan in order to qualify. And if your loans are Parent PLUS loans, all of them must be consolidated into a Direct Consolidation loan before you can enroll in an IDR plan.
As with IDR, Summer can help you navigate the ins and outs of consolidation thanks to our smart consolidation and IDR online tool. Bridget explained, “We will automatically tell you which [loans] are direct and which ones aren’t. And we can help you with all of this paperwork online.”
2. Get your loans out of default
Federal loans are considered in default when you haven’t made a payment in 270 days. (This doesn’t include any loans either in forbearance or deferment.) Having a loan in default does hurt your financial health: your credit score will fall, your income and/or wages may be garnished by the federal government, and you can temporarily lose eligibility for repayment and forgiveness options.
The CARES Act provides protections to borrowers with loans in default, but those measures are expiring at the end of January. So if your loans are in default, now is the time to get on a path that will help you get back on track.
Thankfully, you have a few at your disposal: loan rehabilitation, loan consolidation, and paying in full.
- Loan rehabilitation removes the default—not any late payments—from your credit report, though it takes the longest amount of time. You have to apply, get a new income-based monthly payment amount, and complete nine consecutive on-time payments for the default to be removed from your credit history. Reminder: apply for an IDR upon completing the program to keep your monthly payments affordable.
- Loan consolidation combines multiple loans into a new Direct Consolidation Loan, which won’t be in default. It takes one to two months to process, making it the fastest option, but the default will remain on your credit report.
- Paying in full also won’t remove the default from your credit history, but it will provide immediate relief.
3. Pay your loans off faster
If neither of the previous situations applies to you and you have extra money to put toward your loans, here’s what you can do to get out of debt as soon as possible.
One option is to start making proactive payments on your loans. You can do this by either paying more than what’s due each month or by making additional payments more often.
And you can be strategic with these extra payments by applying them to specific loans. Bridget explained: “Two of the main approaches to this are called the debt avalanche method or the debt snowball method. One is focused on targeting those extra payments to the loans with the highest rates. That will actually save you most money over the long term because you’re paying more on the loans with higher interest rates. The other is about focusing on your loans with the lowest balances. That’s for the psychological boost of being able to see yourself paying those loans off.”
Another option for fast-tracking paying your loan repayment is to lower the interest rates through refinancing. With refinancing, a private lender will replace your existing federal and/or private loans with a new private loan. Not everyone qualifies for refinancing, and private lenders take a close look at your financial and personal profile while evaluating your application.
Even if you do qualify, refinancing may not be your best option because you’ll lose all eligibility for federal loan programs. This includes Public Service Loan Forgiveness, income-driven repayment plans, and forbearance. “Anyone who is pursuing forgiveness programs on your federal student loans, refinancing isn’t for you. If you’re not and you want to pay off your loans more quickly, it can be a great deal to save money over the long run,” Bridget pointed out.
You can also learn more about the advantages and disadvantages of refinancing in our student loan refinancing guide. And if you’re interested in refinancing your loans, Summer’s online tool can help you compare estimates from different lenders.
Anything else I should know?
Yes. Now that we’ve covered the different situations you may find yourself in as a borrower, let’s dive into what’s new in the student loan space.
Navigating servicer changes
Although your loans are federally held, the federal government contracts private companies to service the loans—and you make your payments to these servicers. FedLoan, Granite State, and Navient (three of the largest servicers) recently announced that they will not be renewing their contracts with the Department of Education.
FedLoan and Granite State’s contracts expire at the end of December, whereas Navient has temporarily extended its contract. If any of your federal loans are serviced by these companies, download all statements and documents related to your student loans before your loans are transferred to a new servicer.
Why? “When student loan servicers have changed in the past, they have really not done a good job of passing information along to the new servicers—which means that people who are working toward forgiveness plans or want credit for a certain number of payments, sometimes that information doesn’t reliably transfer,” Bridget explained. “It’s always good to have your own backup so in case there’s a discrepancy in the future, you have something to point to.”
Avoiding student debt scams
Unfortunately, as these changes are happening, student loan scams are on the rise. There’s been an uptick in borrowers receiving phone calls and letters promising relief through non-existent programs, such as “Biden Loan Forgiveness” or “Obama Loan Forgiveness.”
If you get a call or a letter from a non-trusted source about loan forgiveness, do not provide your social security number, loan, or credit card information. If you’ve already given out your personal details, freeze your credit report and submit a complaint to the Consumer Protection Bureau.
Tracking federal policy changes
The federal government has implemented a number of changes to existing loan programs.
To start, there’s the expansion to the Borrower Defense to Repayment program, which forgives loans for borrowers who attended schools that have closed or provided borrowers with fraudulent information. The government also expanded who’s able to get forgiveness under the Total and Permanent Disability Discharge program. And there have been changes to the Public Service Loan Forgiveness (PSLF) program, which you can read about in greater detail in this blog post.
Looking ahead, it’s likely that we’ll see more changes to existing programs, but unlikely that we’ll see across-the-board loan forgiveness. As always, we’ll continue to monitor what’s happening with federal loan programs so we can keep you up-to-date on any new developments. Follow us on Facebook, Instagram, LinkedIn, and Twitter to stay informed and to learn about our upcoming webinars.
Would you like to see your employer offer Summer as a benefit? If so, we’d appreciate an intro to your HR or benefits team. Email us with details at firstname.lastname@example.org, and we’ll take care of the rest!