The Biden administration announced a sixth extension to the student loan payment pause and interest waiver. Here’s what you need to know about it.

What is happening?

Payments on eligible federal student loans will remain suspended until August 31, 2022.

Interest will continue to be waived, costing the federal government nearly $5 billion a month. By the end of August, the federal government will have waived a total of more than $145 billion in interest on federal student loans.

Eligible loans include federal student loans and federal parent loans held by the US Department of Education. This includes all direct loan program loans, FFEL program loans issued under the Guarantee Continuing Access to Student Loans Act (ECASLA) in 2008-09 and 2009-10, and program loans FFEL in default held by surety agencies on behalf of the federal government. .

In a press release, the US Department of Education said, “The extension will give borrowers more time to plan for resuming payments, reducing the risk of delinquency and default after the restart.”

Good news for borrowers in default

Collection activities for defaulted federal student loans, such as wage garnishment, set-off of income tax refunds, and set-off of Social Security benefit payments, will remain suspended.

All borrowers whose loans have been suspended will receive a “fresh start” by resolving outstanding payments and defaults, allowing them to resume repayment in good standing. More than 7 million borrowers were previously in default on their federal student loans.

What about student loan forgiveness?

There is no news on the prospects for broad student loan forgiveness.

The extension gives the Biden administration more time to think about next steps in canceling student loans.

In early March, White House Chief of Staff Ron Klain said the Biden administration would make a decision on student loan forgiveness before student loan payments resume.

The Biden administration has already provided more financial relief to borrowers through existing loan forgiveness and discharge programs than any previous administration. They provided nearly $17.5 billion in loan forgiveness and discharge through the PSLF Limited Waiver for borrowers applying for public service loan forgiveness, automated discharges for total and permanent disability, the revamped Borrower Defense Against Reimbursement Clearance Program and Closed School Clearances.

Will there be more expansions?

Will the August 31, 2022 extension be the last extension? It’s not clear.

Recent expansions have been driven more by politics than politics. Unemployment rates for college graduates have normalized, as have arrears and forbearance rates on student loans that don’t qualify for the payment pause and interest relief.

The legal authority to implement the payment pause and interest waiver is based on the Heroes Act of 2003, which is only in effect until the President’s declaration of a national emergency is rescinded. The limited PSLF waiver, which expires on October 31, 2022, is also based on the Heroes Act of 2003. This indicates that the national Covid-19 emergency will remain in effect at least until that date.

The midterm elections will take place on Tuesday, November 8, 2022. It seems likely that the payment pause and interest waiver will be further extended beyond the midterm elections, if the Biden administration does not implemented a broad student loan forgiveness form on this date.

History of Suspension of Payments and Waiver of Interest

The initial payment suspension and interest waiver was enacted by the CARES Act on March 27, 2020 and was scheduled to expire on September 30, 2020.

It was then extended until December 31, 2020, January 31, 2021, September 30, 2021, January 31, 2022, May 1, 2022 and now until August 31, 2022.

Advice to borrowers

Borrowers should budget for repayment restart, to determine where you will get the money to make student loan repayments when repayment resumes.

Borrowers who are unemployed or still struggling will have the option of pursuing a payment break, but with no interest waiver. Options include economic hardship deferment, unemployment deferment, general forbearances, and income-based repayment plans. If a borrower’s income is below 150% of the poverty line (IBR, PAYE and REPAYE) or 100% of the poverty line (ICR), the monthly loan payment will be zero under the repayment plans based on income.

Borrowers whose defaults will be cleared by the fresh start program may want to explore options to avoid new defaults. They can sign up for autopay, where monthly loan payments are automatically transferred from your bank account to the loan servicer. (Borrowers who make automatic payments are eligible for a 0.25% interest rate reduction, which saves money.) They can also consider an income-based repayment plan, which base monthly loan payments on their income instead of the amount owed.

There are several options for using the money you save by not having to pay off your student loan for four more months:

• To save money, to provide a cushion for the restart of repayment. You could invest the money, although the stock market has been more volatile recently.
• Build or increase your emergency fund. Even if unemployment rates are very low, you never know what might happen over the next two months. It’s a good idea to have an emergency fund with at least half a year’s salary in case you lose your job or have other unexpected expenses.
• Pay off student loan debt. If you make payments on your federal student loans, the entire payment will be applied to the principal, helping you move forward on your student loans. Don’t do this if you’re considering loan forgiveness, as it will reduce the amount of forgiveness you’ll eventually receive. Only about 1% of borrowers continued to make payments on their eligible federal student loans.
• pay high–interest debt. Paying off higher interest rate debt, like credit cards, will save you more money by reducing the average interest rate you pay on your debt.