As you’re probably aware, the COVID-19 pandemic has radically altered many aspects of everyday life. While some things have started inching back toward normalcy, many old customs and practices are still on pause.
We’re all familiar with some of the less-savory aspects of this—the restrictions that have seemingly taken over every minute detail of existence. But there have been some bright spots as well. For many, the Coronavirus pandemic provided some relief from the obligation of repaying student loans.
Through COVID-10 emergency relief and federal student aid, many consumers have been able to make it through what otherwise would have been an impossible situation. It’s important, however, to stay updated on the current status of these programs. Even though they might still be active now, the situation with Coronavirus is constantly changing. Let’s take a look at the present state of COVID-19 emergency relief and federal student aid.
When Do You Have to Start Paying Federal Student Loans Again?
Many borrowers are likely wondering if and when they’ll have to start making payments on their federal student loans again. For those with qualifying federal loans, much of the Coronavirus pandemic has at least allowed for a student loan repayment pause, as well as a freeze of interest. Since March 13, 2020, eligible federal student loans have carried a 0% interest rate and no repayment requirement.
This clearly helped many individuals who otherwise wouldn’t have been able to meet their loan obligations otherwise—especially when society was experiencing a lockdown due to the virus. Along with the virus, however, it’s likely this is going to be winding down to some degree in the not-so-distant future. The most recent update from the Department of Education extended the payment and interest pause until May 1, 2022. After this date, it’s unclear if there will be another extension, or if things will be back to the way they were before COVID-19.
Furthermore, while there were many individuals with high hopes for a potential student loan forgiveness package coming from the Biden White House, this seems to be an unlikely concession at this point. Despite this being one of the main campaign promises of the Biden ticket, this idea has been severely walked back since his inauguration.
How Can You Improve Your Situation Once Loan Repayment Resumes?
There are several differences between federal and private student loans. One of the most prominent rifts between them is the lack of repayment forgiveness in private loans. While those with qualifying federal student loans haven’t been paying them or accruing interest since the start of the pandemic, the same can’t be said for individuals with private loans.
This, however, is likely to change soon. As already mentioned, the pause on student loan repayment is scheduled to expire on the first of May. So, what are borrowers supposed to do if they can’t afford to pay their federal loans when collection resumes? The upcoming deadline here is likely to cause a lot of difficulties for consumers across the board.
A student loan refinance is one option for those who are concerned about their ability to pay their loans going forward. While the federal government has options for consolidating loans, they don’t offer a refinancing option. The inability to refinance can lead to individuals paying a higher interest rate, which can be highly detrimental to one’s savings over time.
So, what is refinancing? The concept of refinancing itself is a quite common practice. It’s done all the time with various forms of loans. When you refinance student loans, you’re simply taking out a new loan that is used to pay off and replace your current one. There are several reasons why someone might want to refinance their student loans—getting a lower interest rate is probably the most common one.
If it sometimes feels like you keep paying money toward your loans but the amount you owe don’t shrink, this is because you’re mostly putting money toward interest each month. Interest is how a lender profits from you loan. They set a rate—either fixed or variable—that determines what percent of the amount you owe is how much you borrowed versus the lender’s profit.
Most long-term interest-bearing loans will be front-loaded. And with student loans, this interest often accrues daily. This can be a particularly tricky situation for those whose loans aren’t subsidized, as they will be collecting interest toward your balance while the borrower is still in school.
When you refinance your student loans with a private lender, it might be possible for you to get a lower interest rate. It’s possible the standard repayment rules for federal loans will be pushed back again. At the same time, it also seems like interest rates are heading into a rising environment as the economy opens up and the Federal Reserve says it will raise them three times in 2022.
While it’s impossible to say how any of this will play out in real-time, those who feel they can pay off their loans more easily with a lower rate—especially those with PLUS loans, which typically come with higher interest rates and fewer benefits than other federal options—might want to consider the benefits of refinancing now. If inflation keeps rising, the Federal Reserve might continue its push to raise interest rates. Those who feel the pause on federal loan payments will likely end at its current deadline could get ahead of a large wave of borrowers and rate increases.
At the same time, there are important considerations to make on the other side of the equation. If you’ve had your interest and payments paused during the Coronavirus pandemic, it’s almost certainly because you have a federal loan. Private lenders aren’t beholden to the same mandates as the federal government. So those who believe federal loans might be forgiven—or plan on utilizing some of their benefits such as income-driven repayment—should think hard before making this decision.
The Coronavirus pandemic has been trying in many ways. Those with federal student loans have at least had payments and interest paused since March 2020. However, with the resumption of standard payments on the horizon, borrowers should consider how they want to proceed.
