If you're juggling federal student loan debt along with other bills, you're about to get another pandemic-related break.
Those who lost a job during the pandemic and now need to decide whether to pay their student loan debt or buy groceries can hold off making federal student loan payments through Sept. 30.
The temporary pause for federal student loan payments had been set to end Jan. 31 for more than 42 million borrowers.
The move means that the interest rate on many federal student loan payments stays set at 0% for another eight months. (But remember, millions of private student loan payments and some federal student loans weren't covered by this deal.)
Time to breathe and pay down other debt
"It really gives people options to get their financial life in order," said Kristen Holt, CEO of GreenPath Financial Wellness, a Michigan-based nonprofit that offers various services nationwide, including a debt management program and financial counseling on student loans.
Some families, Holt said, may be able to use this time to pay off high-rate credit card debt or other bills. Others, if able, might try to set aside extra cash to create or beef up an emergency fund.
Taking care of some other financial headaches, Holt said, will put many families on a better footing once payments on student loan bills must resume later this year.
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"Right now," Holt said, "nothing is forgiven. They still owe the money."
The temporary financial break, which was first announced in March, was extended twice last year and then again, most recently at the request of President Joe Biden, who took executive action on the matter on his first day in office.
"Too many Americans are struggling to pay for basic necessities and to provide for their families," according to an alert from the U.S. Department of Education.
"They should not be forced to choose between paying their student loans and putting food on the table."
Time to review income-driven plans
Holt told me in a phone interview that many borrowers should consider signing up for income-driven repayment plans even now while the pause is in place.
That's because the months when they're not required to make a payment will count in their favor with some income-driven plans that offer loan forgiveness at the end of a 20 year or 25 year period.
Mark Kantrowitz, a student loan expert, noted that the CARES Act, passed in March, specifically counts the payment pause and interest waiver as though the payments were made.
Kantrowitz said he generally advises borrowers to consider an income-driven repayment plan if their total student loan debt at graduation exceeds their annual income, especially if they want to pursue Public Service Loan Forgiveness.
The budget-friendly, income-driven plans offered on federal student loans can help you avoid defaulting if your income is low compared with your student debt burden. In general, monthly payments are calculated based on borrowers’ incomes and family sizes and the plans may be more affordable than other options.
Typically, experts say, borrowers should opt for the repayment plan with the highest monthly payment that they can afford so that the interest doesn't keep building over the long run.
Will there be another pause in payments after September? The Biden administration has left open that possibility. But borrowers would be wise to take advantage of what they know is available right now.
What happens after the pause?
Sarah Sattelmeyer, director of the Pew Charitable Trust's Student Borrower Success project, said financially strapped borrowers need to consider what happens when the payment pause ends.
The latest extension, she said, offers essential breathing room for borrowers during a time when many have lost jobs or seen their hours cut during the pandemic.
But many borrowers still may face difficulty even if the jobs picture improves, as some expect once more people receive a coronavirus vaccine.
"Even before the pandemic, a lot of families were struggling financially," Sattelmeyer said.
"Family financial security really drives borrowers' repayment behavior."
Policymakers should be using this time, she said, to put measures in place to help student loan borrowers smoothly transition back into making payments when that is required.
In addition, Kantrowitz notes that loan servicers will face challenges restarting repayment on all the borrowers all of a sudden, too.
Americans seem anxious about an uncertain future, according to Pew research, with nearly a quarter who are not confident that their household will be financially secure in six months.
"In addition, 58% of borrowers reported that it would be difficult to resume student loan payments in the next month if they had to do so," according to a Pew survey released in October.
Sattelmeyer said those who are at the greatest financial risk will need more help once the payment pause ends.
In the future, some borrowers may need a grace period after the pause in payments ends that can help people who maybe miss their first couple payments right after the program ends. A safety net needs to be in place, she said.
What's often not understood, she said, is that not all student loans are covered by this pause in payments.
About 9 million borrowers — those with private student loans and those with most Perkins loans and Federal Family Education Loans that are not owned by the federal government — are not receiving automatic relief, according to the Student Borrower Protection Center, a nonprofit advocacy group.
With private student loans, borrowers must request relief and their options may be very limited. It all depends on what the lender might offer, if anything at all. Some short-term solutions offered earlier have even expired, according to the Student Borrower Protection Center.
"Borrowers with commercially-held FFEL Program and Perkins loans may be able to get assistance, but it is neither automatic nor as comprehensive as that provided to those with federally held loans," Pew's Sattelmeyer said.
Kantrowitz noted that borrowers with FFEL loans and Federal Perkins Loans can make their loans eligible by consolidating them into a Federal Direct Consolidation Loan.
He noted that FFEL borrowers may be eligible for other types of financial relief, such as economic hardship deferments, unemployment deferments, forbearances and income-driven repayment. The monthly payment under an income-driven repayment plan is zero if the borrower's income is less than 150% of the poverty line.
Pew Charitable Trusts issued a report in January detailing how it is essential to reduce the complexity of the student loan repayment system. One recommendation includes allowing loan servicers to be temporarily permitted to enroll borrowers into an income-driven plan without requiring extensive paperwork.
Borrowers already expressed difficulties navigating the repayment system when the economy was functioning much better than it is now, according to Pew.
The risks are high for failing to repay student loans. Borrowers "can face collection fees; wage garnishment; money being withheld from income tax refunds, Social Security, and other federal payments; damage to their credit scores; and even ineligibility for other aid programs, such as help with homeownership," Pew noted.
Going forward, Biden has proposed forgiving up to $10,000 in federal student loans for borrowers. But borrowers have no guarantees that such a change will take place or when.
Right now, it's important to take a realistic look at your overall financial situation and try to use the next eight months to your advantage.
This article originally appeared on Detroit Free Press: Student loan relief extended until Sept. 30: How to take advantage