Nearly 37 million federal student loan borrowers are getting an extra four months of deferred payments. The White House cited the current high level of inflation as the main reason for extending the pause until December 31.
Wednesday’s announcement was accompanied by a much bigger deal: a long-awaited $10,000 in student debt cancellation for borrowers and up to $20,000 for borrowers who also received Pell grants. This is for student debt only and will only be available to those who meet the income requirements: a maximum of $125,000 for individuals or $250,000 for couples filing their taxes jointly.
Since the federal student loan moratorium went into effect in March 2020, there have been seven extensions. The moratorium was introduced at the beginning of the pandemic when mass unemployment was imminent.
While previous extensions have caused borrowers to be wary of the reset news, expect repayments to resume in January 2023. The White House has expressly stated that this will be the last extension.
Here’s what another payment pause extension will mean:
- Borrowers will have 33 months without having to make payments.
- The pause was interest-free, meaning that the principal amount of the loan did not increase from the beginning.
- Borrowers seeking forgiveness through Public Service Loan Forgiveness and Income-Based Repayment Forgiveness will be 33 months closer to seeing the rest of their debt forgiven.
What the pause did for borrowers
The pause was originally intended to ease the financial pressure on borrowers in the early days of the pandemic.
All this time without payment helped borrowers manage their finances. According to a March 2022 report by the Federal Reserve Bank of New York, borrowers did not have to pay an average of $210 a month. According to a March 2022 California Policy Lab report, most borrowers improved their credit and 44% reduced their credit card use. Those who made payments — about 18%, according to the New York Federal Reserve — potentially reduced their debt faster by taking advantage of 0% interest.
Many borrowers will have their debt foreclosed before the restart begins. Since the start of the Biden administration, at least 1.6 million borrowers have received more than $32 billion in student debt relief through improvements to existing student loan forgiveness programs, such as public service loan forgiveness and borrower repayment protection.
But some borrowers will not be able to make payments even after the end of the forbearance period; it’s good to explore your repayment options long before that.
Another expansion creates uncertainty
While many federal student loan borrowers have their loan balances down to zero, most borrowers still have debt. After 33 months of no payments and no logistics to cancel the loan, borrowers are left with a lot of uncertainty.
“We need to wait for the recommendations,” said Scott Buchanan, executive director of the Student Loan Service Alliance, which represents private student loans with government contracts. “If you call today asking for details, we won’t be told anything. I encourage borrowers to understand that coverage will happen when it’s time for coverage, and they don’t need to do anything until then.”
According to several news surveys, borrowers with student debt are already more likely to put off crucial financial choices related to major life decisions such as marriage, having a child or buying a home.
This long restart delay may mean some borrowers continue to delay making financial decisions until their debt is gone. Others may be making financial decisions they can afford, such as buying a home, but it may not be easy when the payments start again.
In fact, Buchanan says, it’s best not to make major financial decisions based on cancellation or renewal.
“There are a lot of details that need to be worked out, including the implementation schedule, when and if the cancellation will happen [for you]” says Buchanan. “It’s critical that people don’t buy a more expensive car or do anything else with the goal of getting $10,000 in loan forgiveness until it actually happens.”