What To Expect When the Payment Pause Ends
The student loan moratorium ends May 1, 2022. It was put in place to provide temporary relief to student borrowers affected by the COVID pandemic. Only federal student loans are eligible for repayment waivers and interest waivers with the US Department of Education.
The program was launched on March 13, 2020 and has been extended several times since then. The latest deadline for that is May 1, 2022. While there is a lot of speculation as to whether or not the restraint will be extended again, nothing is certain. As of now, payments and interest are scheduled to resume from May 1, 2022.
If the loan repayment period is extended further, this is good news for you. This gives you more time to put your money in order. However, if payments resume, you are expected to begin making monthly payments on your loan balance starting in May 2022.
What to expect when the repayment period ends.
You will receive a notification from your loan provider.
You may have to deal with a different loan service when you resume payments.
If there is no announcement of an extension of the additional moratorium, keep an eye out for any contact from your loan servicing officer. As the payment freeze deadline approaches, loan service providers will begin sending out notifications to borrowers with details about upcoming payments. They will send you detailed information about your monthly payment amount and payment due date. If you do not receive an email or letter, call them and get the details.
Payments will not start immediately.
Not all payments must begin on May 1, 2022, or the first of the following month. It is important to know that not all loan installments are due from the date of resumption of payment or from the first of every month. In general, the payment due dates will remain the same as they were before the moratorium was implemented. However, don’t assume anything. If your loan provider’s letter doesn’t specifically mention your first payment date, call them and double-check your last payment date.
Autopay will not restart automatically.
Signing up for autopay is a smart move. This ensures that your monthly payments are made on time, every time. As an added bonus, you also get a 0.025% reduction in your interest rate when you set up auto payment. If you are making payments through AutoPay, it will stop once the moratorium takes effect. The arrangement will not automatically resume when the loan repayment period has expired and repayment has resumed. After you receive notification from your loan servicer of the deadline date, be sure to speak to your bank and set up direct transfer payments each month before the deadline.
You will pay the same interest rate you were paying before the suspension was announced.
The interest rate on federal student loans is normally fixed. This is regardless of market conditions. Even though market interest rates have dropped significantly since the pandemic, you will not benefit from it. Currently, interest rates on federal student loans are set at zero. However, when the waiver expires, you will go back to paying the regular interest rate you paid previously.
You may have to deal with a different loan service when you resume payments.
Several lenders have terminated their contracts with the federal government within the past two years. If your loan provider is among them, you will receive a new entity notification. Confirm who your loan provider is and obtain their contact details beforehand.
Once the tolerance expires, you cannot pay
Millions of student loan borrowers will likely face financial hardship due to back wages and unemployment caused by the protracted pandemic. If you are one of those who are struggling financially, it is important that you take the time to learn the best way to pay off your student loan.
One thing is for sure, no matter what your financial situation is, those payments will be due. You can’t pay. If you miss a payment, you will pay the consequences in the form of a large late payment fee and interest on the unpaid amount. All of this will send you into deeper debt.
Fortunately, there are a few options available to you if you can’t make your monthly loan payments.
Explore your federal options for student loan forgiveness after your patience runs out
The federal government has several programs designed to provide relief to borrowers who are struggling with payments. If you can’t afford the monthly payments, it’s important to take the time to explore each of these options before the payment period ends.
Income Based Payment Plans
Income-based payment plans have long been a popular financial aid option. These plans set your monthly payments at a percentage of your income. If you earn more, your monthly payments will be correspondingly higher. If your income goes down, your monthly payments will go down, too. This ensures that they are always within reach. If your income has changed in the past two years, ask the loan servicing officer to verify your income so your payments can be adjusted accordingly.
Extended Payment Plans
These plans reduce your monthly payments by extending the term of the loan. How far you can extend your loan term will depend on the outstanding loan amount. You can get a repayment period of up to 25 years without consolidation and up to 30 years with consolidation. Extended payment plans are completely independent of your income.
Postpone Economic Hardship
A hardship deferment provides a respite to repay student borrowers who are in severe financial straits. Borrowers must meet certain criteria to benefit from a hardship deferment. If you meet the requirements, you can defer your payments for 3 years subject to a financial hardship deferment. Remember that the federal government will only pay interest on subsidized loans during periods of economic hardship. However, interest will accrue on unsubsidized loans during the grace period.
Deferral of unemployment is available to unemployed federal borrowers who are actively seeking full-time employment but are still unemployed at the time of application. Borrowers receiving unemployment benefits are also eligible. Unemployment deferment is available in increments of up to 6 months up to 3 years, but not continuously. Even then, the federal government would only pay interest on subsidized loans during the unemployment crisis pause. However, interest will accrue on unsubsidized loans during the grace period.
Patience stops payments on your student loans. This tolerance differs from the government-granted tolerance currently in place. During the government imposed forbearance, no interest is earned on your loans. However, if you apply for forbearance after the end of the loan repayment period, all loans will start earning interest during the forbearance period. The federal government does not pay interest on any student loans during the forbearance period. If interest is not paid as due, it will be added to the loan balance at the end of the forbearance period. Tolerance is available for up to 3 years.
Consider refinancing your student loans after patience runs out.
In addition to federal options for student loan forgiveness, there is a very effective solution for lowering your monthly payments – refinancing.
Refinancing involves replacing your existing loan with a new one. When refinancing student loans, you can choose the most suitable loan terms and payment options. If you can’t afford the monthly payments, you can refinance to extend the term of the loan and lower the monthly payments. On the other hand, you can increase your monthly payments and shorten the loan term if you have free cash and some financial flexibility.
A great reason to refinance your student loans is that interest rates are currently at their lowest levels. Depending on your loan balance, you could save several thousand dollars in accrued interest at a lower rate.
The big drawback is that only private lenders can refinance your federal student loans. Refinancing your federal loans turns them into private loans and you lose all the benefits and protections associated with the original federal loan. You should not consider refinancing unless you are certain that you will not need this protection.
Whatever you do, don’t fall behind on your student loan payments after the loan repayment period is up. You can pay more interest by reducing your monthly payments, but that’s better than the consequences of defaulting on the loan. Defaulting will cost you a late payment fee and interest on the balance. You’ll also lose access to deferment and forbearance options and potentially forfeit your paycheck if you default early.