Student loans are on hold — should you pay anyway?

(NerdWallet) — Payments are currently suspended, without interest, for most federal student loan borrowers through Aug. 31, 2022. This policy does not apply to private student loans.

Borrowers can still make payments to lower their debt during this period of suspended payments, called a forbearance. According to the latest federal data, a total of 500,000 borrowers (about 1.16% of all 42.9 million federal loan borrowers) continued making payments during the pause. Contact your servicer if you have further questions.

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Make no mistake: This is a pause on payments, not forgiveness. Your debt will be waiting for you when repayment begins at the end of the forbearance, unless the policy changes again. While the Biden administration has said it plans to push for expedited $10,000 forgiveness for all federal borrowers, few observers believe such a bill could be moved through Congress quickly.

Until then, here’s how to decide what to do next.

If you want to pause payments

You don’t have to do anything to get a forbearance to stop student loan payments. Interest won’t continue to accrue, as it normally would.

A forbearance could give you breathing room to address other financial concerns.

If you are jobless or working reduced hours, a forbearance may free up cash to pay the rent and utilities or grocery bills. Even if your pay is unaffected, a forbearance could help you divert some money toward building an emergency fund or help you pay another, more pressing debt.

Usually, forbearance is granted at the discretion of the servicer and interest will continue to build. In this case, the Education Department instructed all servicers to automatically place all loans into a forbearance without interest.

If you’re behind on your student loan payments (or get behind)

Federal loans with delinquent payments or defaulted loans will return to “good standing” status when payments start again on Sept. 1, 2022.

Default on federal loans happens when a payment is 270 days past due, sending your loan to collections and exposing you to damaged credit, garnished wages and seized tax refunds.

All collection activities are suspended through Aug. 31, 2022. You can get a refund for any forced student loan payments made since March 13, 2020. If your tax refund was seized before March 13, 2020, it will not be returned.

If your loans were already in forbearance, any interest that already accrued will still be added to your loan principal when your repayment begins, but during the current waiver no new interest will be calculated.

If you are seeking Public Service Loan Forgiveness

The automatic forbearance won’t undo your progress toward Public Service Loan Forgiveness, or PSLF. As long as you are still working with a qualifying employer, months spent in forbearance will count toward PSLF.

Making payments during the automatic forbearance won’t get you ahead on payments. You’re in the same boat whether you pay or not.

Under normal circumstances, only full payments count. You also won’t lose credit for the payments you already made.

If you want to continue making payments

Borrowers might want to continue making payments on federal loans if they want to pay down their debt faster.

If you do continue making payments, you won’t pay any new interest on your loans during the forbearance. This 0% interest rate will save you money overall, even though your payment won’t be lower.

The full amount of your payment will be applied to the principal balance of your loan once all interest accrued prior to March 13 is paid.

Deciding whether or not to make a payment during this time will depend on your original repayment strategy:

• Those sticking to a standard repayment timeline (typically 10 years) could consider making payments. You likely won’t have much outstanding interest and additional payments can help you chip away at your principal during the break. To preserve your flexibility, we suggest opening a savings account and banking those monthly payments, then making a lump-sum payment against your highest-interest loan when repayment begins.
• Borrowers enrolled in income-driven repayment or planning to do so shouldn’t bother making payments now if the ultimate plan is to pay until the loans are forgiven — usually 20 or 25 years. If you want to pay off your loans sooner, then paying now could help you lower the total interest you owe on top of your principal.
• Borrowers seeking Public Service Loan Forgiveness do not need to make payments until at least Sept. 1, 2022. The months of automatic forbearance will count toward the 120 payments needed for forgiveness.

Contact your loan servicer with any questions about continuing or restarting payments during the forbearance period.

If your income has changed

If you experience a change in income and still want to keep your payments going, the best way to lower your payment to something more affordable is to apply for income-driven repayment. You’ll get a new payment that is based on your family size and a percentage of discretionary income, and it will be in effect even after relief has expired. You can apply online at studentaid.gov.

If you are already enrolled in an income-driven plan, make sure to update your income if it has changed due to the economic downturn.

If you were supposed to recertify your plan before Aug. 31, 2022, you’ll now have additional time to do so. IDR recertification dates have been extended until at least March 2023. Borrowers will be notified when it is time to recertify. Temporarily, borrowers with direct loans can self-report their income when applying for or recertifying an IDR plan. That means you won’t have to submit tax documentation, but you will need to select “I’ll report my own income information” in Step 2 (Income Information) of the IDR application. This option ends Feb. 28, 2023.

If you have FFEL Loans

If you have Federal Family Education Loans (FFEL), you are entitled to receive the no-interest forbearance only if the government owns the loans. This won’t be most FFEL borrowers; most of the loans from the now-defunct program are commercially held.

You can find out who owns your loans by logging in to studentaid.gov using your FSA ID.

The only way to get the forbearance for commercially held FFEL loans is to consolidate your debt into a new direct loan. But there are downsides to consolidation:

• Your repayment term will be extended.
• Your interest rate will increase slightly.
• Any unpaid interest will capitalize and be added to the total amount you owe.

Temporary interest-free payments may not be worth those additional long-term costs.

Plus, if you’re already making payments on an income-based repayment (IBR) plan, those previous payments will no longer count toward forgiveness. You’ll have to start all over.

Consolidation can make sense if you have FFEL loans and want to qualify for Public Service Loan Forgiveness. Otherwise, stick with your current loans.

If you’ve experienced a change in income, you can enroll in IBR or recertify early, if you’re already on this plan. IBR will still take into account your spouse’s income. Your loans are also eligible for unemployment deferment, which may make sense if you’ve lost your job but expect to start working again soon.

How to work with your servicer

If you want to restart payments during the automatic forbearance, contact your student loan servicer — it’s the private company that manages payment of your federal loans. But you don’t have to do anything to get the forbearance or the 0% interest rate.

To find out which loan servicer is yours, log in to studentaid.gov with your FSA ID.

You can get in touch with all of the loan servicer contact centers by calling 1-800-4-FED-AID.

For additional information visit studentaid.gov/coronavirus for forthcoming details.