What happens when the student loan payment break ends?
Federal education loans held by the US Department of Education are eligible for an automatic payment break and interest relief, which has been extended until December 31, 2020. Will the payment break be- it again extended? What happens to student loans at the end of the payment break?
What is the payment pause and interest waiver?
On March 13, 2020, President Trump announced a 60-day payment suspension and interest waiver for certain federal student loans.
The CARES law, enacted on March 27, 2020, automatically suspending repayment and setting the interest rate at zero on eligible loans until September 30, 2020.
President Trump signed an executive order on August 8, 2020, directing Secretary DeVos to extend the payment break and the interest exemption until December 31, 2020.
Which federal loans are eligible for the payment break and interest relief?
Only loans held by the US Department of Education are eligible. This includes the following loans:
- All Federal Student Loans from the Direct Loans Program
- Federal loans granted under the FFEL program in 2008-09 and 2009-10 under the Ensuring Continued Access to Student Loans Act (ECASLA) whose title has been transferred to the US Department of Education
- Federal Perkins Loans that were awarded by the college to the US Department of Education
FFEL program loans held in commerce and Federal Perkins loans held by colleges are not eligible for the payment break and interest exemption. Private student loans and private parental loans are not eligible.
Will the payment break and interest waiver be extended again?
When President Trump announced the extension of the payment break and the interest waiver until December 31, 2020, he said he could extend it further. The signing statement was “Today I am extending this policy until the end of the year, and we will extend it further than that, most likely just after December 1.”
The Heroes Act, which was introduced in the House on May 12, 2020 and pass House on Mary 15, 2020 extends the payment break and interest waiver until September 30, 2021. This legislation demonstrates bipartisan support for an extension of the payment break and interest waiver.
However, the Heroes Act is stuck in the Senate and it’s unclear whether an extension of the payment break will be enacted during the lame duck.
What happens if the payment break is not extended?
Millions of borrowers can experience financial hardship if the payment break and interest relief are not extended.
If the payment break and interest waiver are not extended, loan managers will send letters and other communications to borrowers letting them know that repayment will resume on January 1, 2021.
Borrowers who have subscribed to AutoPay, where the monthly loan payments are automatically transferred from their bank account to the lender, will likely need to re-enroll. After all, the lender will need confirmation that the borrower’s bank account information is still valid.
If a borrower is unemployed or has had their wages cut, they may not be able to start paying off their student loans again. Borrowers who recently graduated or dropped out of college are more likely to have been affected.
There are a few options for continuing to withhold reimbursement after the payment break has ended. These include the postponement of unemployment, postponement of economic difficulties and tolerances. Each of these options has a three-year limit.
The federal government pays interest on subsidized loans during a deferral, but not during a forbearance. Interest on unsubsidized loans remains payable by the borrower both during postponement and during forbearance. If interest is not paid as it accrues, it is added to the loan balance at the end of the deferment or forbearance period.
Borrowers who are having trouble repaying their federal student loans may also switch to a income based repayment plan, which bases the monthly payment on a percentage of the borrower’s income, as opposed to the amount the borrower owes. If the borrower’s income is less than 150% of the poverty line, the monthly loan payment is zero.
The federal government pays accrued but unpaid interest on subsidized loans in the first three years of the IBR, PAYE, and REPAYE repayment plans, and half of the accrued but unpaid interest on unsubsidized loans. During the remainder of the repayment term, the federal government pays half of the accrued but unpaid interest on all federal student loans as part of the REFUND repayment plan.