The COVID-19 emergency forbearance for federal student loans is set to expire on September 30, 2021...for now. But could there be another payment pause and interest waiver extension?
The expiration date for the suspended payments has previously been extended three times, from September 30, 2020 to December 31, 2020, January 31, 2021, September 30, 2021 and currently January 31, 2022.
Borrowers wonder whether there might be a fourth payment pause and interest waiver extension. There are a few factors that point towards this being a strong possibility, but it's unlikely to be extended beyond the current date of January 31, 2022. Here's what you need to know.
Policymakers Ask For A Payment Pause And Interest Waiver Extension
In an interview on May 20, 2021 with the Education Writers Association (EWA), Secretary of Education Miguel Cardona said “We’re looking at it [pausing student loans beyond September].”
On June 21, 2021, 64 Democrats sent a letter to President Biden calling on him to extend the payment pause and interest waiver to March 31, 2022.
And on June 30, 2021, Senator Patty Murray and Representative Bobby Scott, chairs of the Senate and House education committees, sent a letter to the President asking for a payment pause and interest wavier extension until early 2022.
The End Of FedLoan Servicing And GSMR
The Pennsylvania Higher Education Assistance Agency (PHEAA) services federal student loans in the Direct Loan program as FedLoan Servicing and is the sole servicer of the Public Service Loan Forgiveness program (PSLF). PHEAA announced on July 8, 2021 that it will not seek to renew its contract with the U.S. Department of Education when it expires on December 14, 2021.
PHEAA services a quarter of the borrowers and a third of the dollars in the federal government’s student loan portfolio. This raises the possibility that many borrowers will experience a restart of repayment followed within 2-3 months by a change in student loan servicer.
Furthermore, on July 20, 2021, Granite State Management and Resources (GSMR) also announced they would not seek to renew their contract with the Department of Education. This is an additional 1.3 million borrower accounts that are impacted. This could cause a lot of confusion.
It would make a lot of sense to handle both changes at the same time. That way borrowers would get just one notice telling them where to send their student loan payments. This increases the likelihood of a payment pause and interest waiver extension.
Others Reasons For Extending The Payment Pause And Interest Waiver
So long as the COVID-19 national emergency declaration remains in effect, the Heroes Act of 2003 allows the U.S. Department of Education to provide the payment pause and interest waiver. If the President rescinds the national emergency declaration, the authority to provide this special forbearance will end.
Whether the federal government extends the payment pause and interest waiver further will likely depend on the financial impact of the pandemic and economic disruption on borrowers. This will manifest itself in unemployment rates and loan forbearance rates.
Waiting until the unemployment rates and forbearance rates normalize is consistent with providing a payment pause and interest waiver extension through the end of the year. We examine both factors below.
Unemployment Rates By Educational Attainment
The payment pause and interest waiver might be extended if the unemployment rates for college graduates have not yet normalized as of January 31, 2022.
This chart shows monthly unemployment rates by educational attainment for people age 25 or older from December 2015 to June 2021.
The hope is that unemployment rates will continue to improve at the same pace they have in the last 12 months If that happens, they should reach pre-pandemic levels by the end of the year.
The economic recovery could, of course, stretch out longer. But that's unlikely as this downturn was caused by a pandemic, not underlying economic factors. As the pandemic is addressed, the economy should recover.
Student Loan Forbearance Rates
Forbearance rates for loans that are not eligible for the payment pause and interest waiver have either normalized or are close to normalizing.
Only 11.2% of federal student loan borrowers are actively repaying their federal student loans, as of March 30, 2021. That numbers is based on an analysis of data from the National Student Loan Data System (NSLDS). But the payment pause and interest waiver is automatic for eligible loans. In other words, borrowers have to take extra steps to continue repaying their eligible loans.
But if we only look at loans that aren't eligible for the payment pause and interest waiver, it paints a different picture. Only 1.2% of eligible federally-managed federal student loans are in active repayment. This compares with 68.5% of Federal Family Education Loan (FFEL) borrowers who aren't eligible for the payment pause and interest waiver.
As shown in this chart, the percentage of borrowers who are in active repayment on their ineligible federal student loans has largely normalized.
There are similar results for the forbearance rates on private student loans.
This chart shows the forbearance and delinquency rates by quarter for Sallie Mae's private student loan portfolio. This is based on Sallie Mae's 10-Q and 10-K SEC filings (search for "loans in forbearance as a percentage")
The chart demonstrates that the forbearance rate for the quarter ending March 2021 has normalized. It shows that 3.7% of borrowers were in forbearance as of March 31, 2021. That's lower than the 3.8% of borrowers who were in forbearance on March 31, 2019, before the pandemic.
The delinquency rates have also improved, from 2.5% to 2.1%. So this trend is not due to a shifting of borrowers from forbearance to delinquency. These charts indicate that the negative impact of the pandemic on borrowers’ ability to repay their federal and private student loans has ended.
There are, however, a few caveats. FFEL loans were last made in June 2010, yielding a more mature student loan portfolio. Private student loans are credit underwritten. So both types of loans are less likely to encounter financial difficulty than loans borrowed by more recent college graduates.
Nevertheless, the forbearance rates for borrowers who are ineligible for the payment pause and interest waiver have mostly normalized.
What Happens When The Payment Pause And Interest Waiver Ends?
If the payment pause and interest waiver is not extended, payments will start resuming on February 1, 2022. That's less than 3 months from now. Loan servicers would be expected to notify borrowers about the date their payments resume sometime in December 2021.
Borrowers should make sure that their loan servicer has their current contact information. Those who signed up for autopay may be required to confirm that their bank account information has not changed.
Borrowers can review a list of their federal loans by logging into StudentAid.gov. They can also check their credit reports, which they can get for free through AnnualCreditReport.com. Keep a list of your loans to ensure that you don't accidentally overlook a few of them when payments restart.
Options For Borrowers Who Are Unable To Restart Repayment
Borrowers who are unable to make their student loan payments after repayment resumes should contact their loan servicer to explore their options.
The call centers may be very busy. So borrowers may get quicker results if they contact the loan servicer using the loan servicer’s online contact forms.
The important thing to know is that you do have options for avoiding a repayment obligation. Here are three choices to consider.
Forbearance And Deferment
Borrowers can use a deferment (economic hardship deferment or unemployment deferment) or a forbearance (general forbearance) to suspend repayment. Each of these is available for up to three years. Interest may continue to accrue while payments are suspended, depending on the type of loan.
If unpaid interest does accrue, it will be capitalized when you restart repayment. If the borrower can afford to do so, they might want to make interest-only payments during a deferment or forbearance. Interest-only payments are lower than full payments.
Income-Driven Repayment Plans
Borrowers who have lost their jobs or experienced a pay cut may want to apply to join an income-driven repayment plan (IBR, PAYE, REPAYE, or ICR). If the borrower's income is less than 100% of the poverty line (ICR) or 150% of the poverty line, the monthly payment is zero.
If a borrower is already in an income-driven repayment plan and lost their job, they can ask the loan servicer to recertify their income early, to reflect the new lower income. The loan servicer will want to see copies of documentation of the change in income, such as a job layoff notice or proof of the recent receipt of unemployment benefits.
Borrowers can also switch to the Extended Repayment Plan (fixed or graduated) if they have over $30,000 in outstanding Direct Loans. While income-driven repayment reduce the monthly payment by basing it on your income, the Extended Repayment Plan reduces the monthly payment by using a longer repayment term.
In both cases, more interest will accrue over the (longer) life of the loan. However, only borrowers who choose an income-driven repayment plan have the opportunity to earn forgiveness at the end of their repayment term. So the Extended Repayment Plan is typically only worth considering for borrowers who work in the private sector and have high incomes.
Even if there is a payment pause and interest waiver extension, it will be temporary. Eventually payments will restart. It's only a question of when.
Borrowers (who are able) should strive to take full advantage of the payment reprieve while it's still in effect to make progress towards their financial goals. But regardless of when the pause lifts, federal borrowers should know that they always have options to make their monthly payment obligations more manageable.
Mark Kantrowitz is an expert on student financial aid, scholarships, 529 plans, and student loans. He has been quoted in more than 10,000 newspaper and magazine articles about college admissions and financial aid. Mark has written for the New York Times, Wall Street Journal, Washington Post, Reuters, U.S. News & World Report, MarketWatch, Money Magazine, Forbes, Newsweek, and Time. You can find his work on Student Aid Policy here.
Mark is the author of five bestselling books about scholarships and financial aid and holds seven patents. Mark serves on the editorial board of the Journal of Student Financial Aid, the editorial advisory board of Bottom Line/Personal, and is a member of the board of trustees of the Center for Excellence in Education. He previously served as a member of the board of directors of the National Scholarship Providers Association. Mark has two Bachelor’s degrees in mathematics and philosophy from the Massachusetts Institute of Technology (MIT) and a Master’s degree in computer science from Carnegie Mellon University (CMU).