How the Student Loan Payment Delay Can Impact Your Financial Health
Tens of millions of people live with student loan debt. For many, this onus is par for the course of being an American who desires a career — or, at least, a chance at one.
Though it’s become normalized, student debt is a fairly scary burden to bear. It can inhibit one’s sense of financial and personal freedom and when you’re steeped in it, there’s always looming questions: What if I miss a payment? Will this affect my ability to take out a loan on, say, a mortgage? What if I am never able to pay this off?
Debt is inherently frightening, but it’s important to know exactly what to be concerned about when it comes to student loans. For instance, with the Biden administration extending the student loan moratorium, we must ask: Does a student loan payment delay impact your financial health? If so, how? Let’s explore the scenario.
For Worried Borrowers, This Is Delightful News
While the student loan repayment pause is not a student loan cancellation, it does alleviate some pressure and can save borrowers some substantial money in interest — which, as any student loan borrower knows, can be the most brutal aspect of the loan.
“By the time the payment pause and interest waiver expires on August 31, 2022, it will have saved federal student loan borrowers a total of more than $145 billion in interest,” said Mark Kantrowitz, author of How to Appeal for More College Financial Aid. “That’s more than $100 per borrower per month.”
Additionally, the paused payments count as though they were made toward Public Service Loan Forgiveness (PSLF) — and the 20 or 25-year forgiveness at the end of an income-driven repayment plan, Kantrowitz highlighted.
“That’s a total of 30 payments toward the required 120 payments for PSLF, or a quarter of the total,” Kantrowitz said. “In effect, the payment pause and interest waiver is providing borrowers with student loan forgiveness, since that’s 30 payments they will not have to make.”
A ‘Fresh Start’
Biden’s latest student loan relief announcement includes a pretty major perk: the “fresh start.”
“The announcement of the latest extension mentions the fresh start program, where more than 7 million borrowers with defaulted federal student loans will be returned to a current status,” Kantrowitz said. “That means the default and delinquencies will be removed from their credit history, providing a big boost to their credit scores.”
So, if you defaulted on a student loan in the past, all is now forgiven. By that logic, not only does this repayment pause not harm your financial health, it actually could restore it.
“This will help [borrowers] qualify for credit cards, auto loans and mortgages,” Kantrowitz said. “In addition, it also means no more wage garnishment, offset of income tax refunds or offset of Social Security disability and retirement benefits.”
Don’t Mess It Up
Now that borrowers who have erred have a chance to make things right, it’s crucial that they don’t make the same mistakes again.
“It is especially important for these borrowers to take steps to avoid re-defaulting when repayment resumes, such as signing up for AutoPay, using deferments and forbearances to continue to suspend payments if needed, or switching into an income-driven repayment plan,” Kantrowitz said.
See What Changes You Can Make Now
Thanks to the extended moratorium, now is the time to see if there are any changes you can make to your student loan repayment plan.
“Take advantage of this time to decide what next steps are best for you,” said Charlie Javice, head of student solutions, Chase. “If you are able, take advantage of the 0% interest rate and continue to pay down student loans through the pause, saving more money in the long run. Use this time to enroll in a repayment plan that is affordable for you, and set up autopay to avoid defaulting on a payment once the pause ends. If you were enrolled in autopay prior to the payment pause, you must re-enroll to continue paying down your loan during this time.”
Address Other Debts
The only real bummer here is that borrowers may feel like they’re floating in limbo, unsure of when things will “get back to normal.”
“The pause on student loan repayment may leave some folks feeling an elongated sense of uncertainty,” said Anuj Nayar, SVP, financial health officer and head of communications at Lending Club. “Regardless of what’s happening with pauses, inflation is still on the rise. And, as new LendingClub and PYMNTS data shows, even the higher income earners are living paycheck to paycheck.”
If you’re not taking advantage of the pause on student loan repayment, now is still an excellent time to address other debts.
“With interest rates rising, consider exploring refinance options on your existing loans,” Nayar said. “There are a few other methods to paying off debt, like the snowball and avalanche methods, that can help structure how you pay them off.”
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