(From the Financial Literacy Blog) – If you have federally held student loans, you won’t need to make payments again until October. While student loan payments were previously scheduled to resume on February 1, President Joe Biden signed an executive order directing the Department of Education to extend the forbearance period through September 30, 2021. Here are answers to a couple questions you may have:
What Is Forbearance?
Student loan forbearance is a way to lower or stop making your payments temporarily. Most types of forbearance are not automatic––meaning you need to submit a request to your student loan lender. With general forbearance, you can submit a request if you’re unable to make your loan payments because of financial difficulties, medical expenses, a change in employment, or for other reasons deemed acceptable by your lender. If your request is granted, you are usually still responsible for paying the interest that accrues during the forbearance period. If you don’t, whatever interest you didn’t pay will be added to your principal balance at the end of the forbearance period. General forbearance can only be granted for up to twelve months at a time. If you still can’t make your payments after the first year, you’ll need to make another request. While not making payments can provide you financial relief during periods of fiscal hardship, you aren’t making any progress toward paying back your loan.
In addition to general forbearance, there is mandatory administrative forbearance. Unlike general forbearance, your student loan provider must place you in a mandatory administrative forbearance if you qualify for it. You qualify for mandatory administrative forbearance if you’re participating in a medical or dental internship or residency, you have payments that exceed twenty percent of your monthly gross income, or you serve in the National Guard or AmeriCorps. Mandatory administrative forbearance is automatically granted when you can’t make payments due to circumstances beyond your control. However, you can choose to opt out and continue making payments.
Due to the COVID-19 pandemic, all federal student loan borrowers were automatically placed in a mandatory administrative forbearance in March of 2020. No payments have been required and the interest rates on student loans were automatically set to 0%. On his first day as president, Joe Biden signed an executive order that directed the Department of Education to extend the forbearance period until September 30, 2021.
What Should I Do?
If you have student loans that have been automatically been placed in administrative forbearance, what should you do? The answer depends on your current financial situation. If you’re experiencing financial hardship as a result of the pandemic, the money you would’ve usually made a student loan payment with may be better allocated toward high-priority bills, such as your mortgage or rent. With no interest accruing until October, you won’t be penalized for not paying your student loans at this time. However, your mortgage lender or landlord may not be as forgiving. If you are trying to prioritize what payments you can afford to make, continue paying the bills that aren’t offering a temporary pause on both the principal balance and interest. Further, if you’re juggling other debt, consider taking advantage of this 0% interest period and pay down outstanding balances on whatever high interest debt you may have. For example, if you have credit card debt with a high interest rate, pay that off first. That may save you more money on interest over the life of the loans.
If you don’t have other high interest debt or your financial situation hasn’t been impacted by the pandemic, opting out of the forbearance period may be a good option. With the interest rate set to 0% during this time, any payments that you do make will go entirely towards paying off your principal balance. This can help you pay off your student loan sooner.
Whether you continue to make payments or not, you should be preparing for when the administrative forbearance period ends in October. For questions about prioritizing your payments during this time, contact your local credit union for help.