4 things student loan borrowers should know about the extended payment pause

Personal finance

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Student loan borrowers got some happy news this holiday season: They’ll have an additional three months before they have to start making their payments again.

The payment pause, which has been in effect since March 2020, was scheduled to expire Jan. 31, but the Biden administration announced it was extending the relief until May 1.

Outstanding student loan debt in the U.S. has surpassed $1.7 trillion and burdens Americans more than credit card and auto debt. Around a third of borrowers are in delinquency or default. The average monthly payment is around $400 a month.

Recent polling of student loan borrowers found that even among those who are fully employed by now, 89% are still not financially secure enough to restart payments.

“We know that millions of student loan borrowers are still coping with the impacts of the pandemic and need some more time before resuming payments,” President Joe Biden said in a statement last week.

Here’s what you need to know.

1. Most loans won’t collect interest

Interest will remain suspended on federal loans in the Direct program.

Experts recommend keeping a record of your balance before the beginning of the payment pause, so that you can make sure it hasn’t changed once bills resume in May.

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Holders of Federal Family Education Loans and private student loans are not covered by the policy, meaning their debt will continue to grow with interest.

2. Garnishment is still suspended

During the payment pause, the government has put on hold its enforcement activity against defaulted student loan borrowers.

That means that those behind on their payments will be protected until May from garnishments of their wages, tax refunds and Social Security checks.

3. It doesn’t make sense for some to keep paying

Borrowers who can afford to may want to take advantage of the temporary suspension of interest to pay down their education debt’s principal.

But there are exceptions.

If you’re pursuing public service loan forgiveness or are on an income-driven repayment plan, it’s a bad idea to continue making payments, experts say.

That’s because the months of the payment pause count toward the eventual debt forgiveness these programs lead to — whether or not you’re paying, and so any money you direct to your loans during this reprieve just reduces the amount of forgiveness for which you’ll eventually be entitled.

4. In the meantime…

The Covid pandemic has taught us how important it is to have a healthy savings account to fall back on. People should try to build up at least six months’ worth of expenses in cash, experts say. To get the best return on your money, keep it in a high-yield savings account, experts say.

With interest rates on most federal student loans at zero, it can also be a good time to make progress paying down more expensive debt. The average interest rate on credit cards is currently more than 16%.

However, make sure you have enough in your emergency savings account before you address credit card debt, said Ted Rossman, an industry analyst at Creditcards.com.

That’s because your credit limit shouldn’t be relied on as a safety net.

“Many people had their credit card limits cut unexpectedly over the past year as lenders got especially worried about risk,” Rossman said.

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