You Don’t Have to Pay Federal Student Loans Until 2021 — But You Should

Approximately 43 million Americans who carry student debt backed by federal government programs can reduce or suspend loan payments until December 31, 2020, based on the latest outline in the Coronavirus Aid, Relief and Economic Security (CARES) Act. Even better? The interest rate on those loans continues to be 0%.

[ Read: Best Private Student Loans of August 2020 

While Trump and Democratic presidential nominee Joe Biden have specific ideas about dealing with the crushing problem of student debt, many carrying those loans can breathe a sigh of relief with the student loan repayment extension. However,  “forbearance” doesn’t mean “forgiveness.” When the calendar page flips to January 1, 2021, payments on student loans will resume. 

“If you have the means, you can continue to make payments, or even greater payments, than your minimum, and you will make a much bigger dent in your loan principle than normal,” says Daniel J. Mendelson, author of BYE Student Loan Debt, a book that details his own journey of paying off nearly $150,000 in student loan debt within five years.

Who benefits from the student loan payment relief extension?

The CARES Act student loan forbearance clause — and the follow-up extension — will offer some financial relief to millions of Americans, including the following groups:

Those facing financial hardship

“The biggest benefactors who should utilize student loan payment relief are people who are struggling to pay their monthly bills, on top of other daily living expenses,” Mendelson explains. The extension will also help people who have lost their jobs and those who are facing financial uncertainty due to the pandemic.

Borrowers whose loans are in default

Under the CARES Act, the Department of Education stopped making collection calls and sending letters and billing statements to those whose loans were in default. The suspension of such calls, letters and billing statements will continue on federal student aid until the end of 2020. “The forbearance stops collections on defaulted student loans,” explains accredited financial counselor Kimbree Redburn, founder of Illuminate Financial

[ Read: How Should You Prepare For the End of the CARES Act? ]

“It is also important for borrowers who are in the process of rehabilitating their student loans to know that if they have already entered into a rehabilitation agreement, their suspended payments will count towards this agreement.”

Recent college graduates

Unfortunately, unless another extension is granted, the current loan forbearance might not have as much of an impact on those who graduated from college in June 2020 or later. Repayments for student loans generally don’t start until six months after graduation, which would begin after the existing forbearance extension ends.

[ Read: Eight Employers That Will Help You Pay Off Your Student Loans ]

Borrowers who can still make payments

While the extended forbearance is geared toward those struggling financially, borrowers who are in a position to continue payments can also benefit, thanks to the non-existent interest rate. “For those with student loans who can continue to make payments, the benefit is that all of their monthly payment will be applied toward their principal, once all interest is paid,” Redburn adds. “This is a benefit because it will help these borrowers pay off their student loans more quickly.”

Should everyone stop paying their student loans?

Mendelson explains that repaying loans during this period can lead to better credit scores, debt-to-income ratio reductions and a rapid decrease in the total student loan amount — and that borrowers interested in making payments should remember three things.  

  • During this time, you can still make loan payments. 
  • If you have automatic payments set up, they will no longer be automatically withdrawn
  • You will need to opt-out of forbearance if you want payments to resume.

Redburn agrees that those who can continue paying student loans should do so since the entire payment will be applied to the loan’s principle. “It will allow for less interest to accrue later, once interest rates go back to their normal level because your principal amount will be reduced,” she adds. 

What would Trump and Biden do for student loan borrowers?

With student loan debt being a large problem, both President Donald Trump and Democratic presidential nominee Joe Biden have their own ideas about the issue. 

Trump’s proposal to privatize the student loan system

Last year, Trump proposed privatizing the current student loan system and handing student debt issuance to private banks. This wouldn’t change much for existing student loan borrowers, and it remains uncertain how it would impact future borrowers. However, while that idea hasn’t made it out of the proposal stage, the Trump administration has issued an executive order making forgiveness on federal student loans easier for veterans with disabilities.

[ Read: Could Student Loan Forgiveness Reduce the Racial Wealth Gap? ]  

Biden’s support for student loan forgiveness

Biden’s proposal includes forgiving all undergraduate federal student loan debt borrowers who attended public colleges and universities, historically Black colleges and universities and private minority-serving institutions. The plan also calls for student loan forgiveness for borrowers earning less than $125,000 per year.

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Amy Sorter

Contributing Writer

Amy Sorter is a finance and real estate journalist with more than 20 years of experience. Her writing has been featured in The Business Journals and The Simple Dollar.

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  • Andrea Perez
    Andrea Perez
    Personal Finance Editor

    Andrea Perez is an editor at The Simple Dollar who leads our news and opinion coverage. She specializes in financial policy, banking, and investing.