The United States Department of Education tells borrowers to start paying their federal state student grants in January.
There’s no word yet on whether President Trump will renew the payment hiatus and interest waiver. Congress doesn’t seem closer to passing another COVID-19 bill for financial aid. First President-elect Joe Biden could take action to extend the payment break and interest waiver is January 20, 2021, leaving a 20-day period after the payment break expires.
[Update: On Friday, December 4, 2020, Secretary DeVos announced a one-month extension of the payment pause and interest waiver until January 31, 2021.]
Borrowers have a few options for dealing with their federal student loans. They can start paying back their federal student loans, seek a different type of deferment or forbearance, switch to an income-oriented repayment plan, or refinance the federal loans in a private student loan.
Borrowers should contact their loan service provider to inquire about the expiration date of their federal student loans.
A late payment is considered past due if it is received more than 30 days late in the Direct Loan program and 15 days late in the Federal Family Education Loan Program (FFELP). (Payments made more than 15 days late in the Direct Loan program do not count towards forgiveness of public service loans.) Late payment fees are 6% of the amount due. If the borrower makes a partial payment, the late payment fee is based on the unpaid portion of the payment.
Borrowers who pay off their loans through AutoPay must reconfirm their bank account information with the loan manager. Do not assume that the direct debits will be resumed.
Options for procrastination and forbearance
Even if the payment break and interest forgiveness ends, there are other deferral and forgiveness options that may be available to borrowers. These include the postponement of unemployment, postponement of economic hardship and tolerance.
Deferral and deferment of payment suspend loan payments, but interest may continue to accrue on certain types of federal loans. During a grace period, interest is charged on unsubsidized loans and is capitalized at the end of the grace period. During a forbearance, interest is charged on subsidized and unsubsidized loans and will be capitalized at the end of the forbearance period.
Eligibility criteria depend on the type of deferment or respite.
- Unemployment Postponement. The unemployment deferral is available in six-month increments up to a total of three years. The borrower must be receiving or seeking unemployment benefits and not be able to find a full-time job. The job is expected to last a minimum of three consecutive months. The job must include at least 30 hours of work per week, so part-time work doesn’t necessarily disqualify the borrower. Borrowers must register with a nearby job placement agency to be eligible and must make six attempts to find a job in the first six months or they will not be eligible for the postponement of unemployment. Borrowers who declined a full-time job offer are not eligible.
- Postponement of economic problems. Borrowers may qualify for the deferment of economic hardship if they receive federal or state government support (e.g., TANF, SSI, and SNAP), serve in the Peace Corps, work full-time but earn less than the federal minimum wage or full-time work but earn less than 150% of the poverty line.
- Tolerance. Borrowers may qualify for forbearance when their monthly student loan payments equal or exceed 20% of their monthly income. There are a number of other tolerances that may apply so it is best to ask the loan manager about the options available.
To qualify for deferment or forbearance, the borrower must not default on their federal student loans.
Change amortization plans
Borrowers struggling to pay their monthly student loan can switch to a different repayment plan. A longer repayment term generally results in a lower monthly payment. Income-driven repayment plans will yield a zero monthly student loan if the borrower has low or no income.
Extended repayment offers a 25-year repayment term if the borrower owes at least $ 30,000 in federal student loans. If the borrower consolidates their federal student loans, the repayment term will depend on the amount of the debt, with a 20-year term for $ 20,000 in debt, a 25-year term for $ 40,000 in debt, and a 30-year term for $ 60,000 of debts. . A 30 year repayment term can halve the monthly payment compared to a 10 year repayment term.
If the borrower’s income is less than 150% of the poverty line, his monthly loan will be zero below the means-tested repayment (IBR), the income-based repayment (PAYE), and the revised payment based on your income. earn repayment plans (REPAYE). In the means-tested repayment plan (ICR), the borrower’s income must be less than 100% of the poverty line to qualify for a zero monthly payment.
If the borrower already has an income-driven repayment plan and their income has declined since last year, they can recertify their income early to qualify for a lower loan.
The federal government pays accrued but unpaid interest on subsidized loans in IBR, PAYE, and REPAYE for the first three years. In REPAYE, the federal government also pays half of the accrued but unpaid interest on unsubsidized loans during the first three years and half of the interest on subsidized and unsubsidized loans after the first three years.
Refinancing in private student loans
Interest rates are at or near record lows, so it may be a good time to refinance federal education loans into a private student loan, especially if the federal loans are from several years ago when interest rates were much higher.
A lower interest rate can yield a lower monthly payment. However, the lowest interest rates may require a shorter repayment term, which can increase monthly loan payments.
Please note a private refinance is a new loan and is not eligible for any of the superior benefits available on federal loans, such as longer deferral and grace periods, income-driven repayment, and loan forgiveness.
Borrowers who expect President-elect Joe Biden to deliver on his campaign promise to forgive student loans may want to hold off on refinancing, in case their loans become eligible for full or partial forgiveness. Loan forgiveness can be limited to federal loans only.
Borrowers don’t have to worry about interest rates rising in the near future, as the Federal Reserve has said it will keep interest rates low until at least the end of 2021 and maybe even 2022 or 2023.
Of course, nothing should stop a borrower from refinancing a private, non-federal loan into a new fixed-rate private student loan, if he can qualify for a lower interest rate.
Borrowers should be careful when refinancing to a floating rate loan. While variable interest rates can be lower than the equivalent fixed interest rates, variable interest rates have nowhere else to go but increase. Only if the borrower can pay off the private loan in just a few years, before interest rates rise too much, should he consider refinancing in a floating rate loan.
Borrowers seeking private refinance should shop around as the lowest rate advertised is not necessarily the one they will get. The interest rates and eligibility depend on the borrower’s credit score (and co-signer, if applicable), as well as the debt-to-income ratio and length of service with the borrower’s current employer.
Talk to the lender or lender
If a borrower is facing financial difficulties, they should contact the borrower servicers to inquire about their options. Lenders have many options for helping borrowers who are unable to resume payments on their loans.
Before contacting the lender or lender, check the lender’s website to see what options are listed on the website. Sometimes the lender’s website will offer more options than stated during a telephone or e-mail conversation.