You’re likely aware that payments and interest on federal direct education loans have been suspended. The suspension began last March and has been extended several times since then, both through the CARES Act and subsequent administrative orders. The most recent extension runs through September 30, 2021. The suspension includes the following provisions:
- All federal direct loans including direct student loans, direct PLUS loans for parents or grad students, and direct consolidation loans have a 0% interest rate and no payments due during the suspension period.
- Those enrolled in Public Service Loan Forgiveness or an Income Driven Repayment plan will get credit for payments as though they had been making the payments monthly during the suspension period.
- Those in IDR do not need to recertify income for this year at this point. Typically this is required by Jan. 31; anyone in IDR will be notified by their loan servicer when they need to recertify.
There’s also been a good deal of chatter about loan forgiveness. There are several reasons to believe that Biden’s proposal to cancel $10,000 of student debt per borrower could actually happen, especially:
- Removing a large number of small borrowers from the system would reduce systemic burdens related to the Herculean task of restarting loan payments once the suspension ends. There are about 45 million total borrowers in the federal loan system; about 1/3 owe $10,000 or less. Thus canceling $10,000 of debt for each borrower would dramatically reduce the number of borrowers for whom payments need to be restarted.
- Late in 2020, the Department of Education wrote off $435bn of existing student loans in its portfolio. This is largely related to income-based repayment, but one side effect of this write-down is that based on accounting rules, there would be no impact to the federal budget of canceling that much student debt.
Besides newsworthiness, there’s a reason to look at these two issues together. First, the payment suspension on direct student loans has created a temporary interest-free borrowing opportunity. Students and their families have an opportunity to borrow at zero cost for at least the next 8 months. This can be a great cash flow tool, especially for families who have a student graduating this year: taking out a loan now allows you to defer the expense for at least the next 8 months with the option of repaying the loan at that time or paying it off over time at this year’s low interest rates. (Bonus: 2019’s changes to 529 rules mean that even if you have enough in your 529 to cover your remaining costs, you could simply use your 529 to pay off the loan when the suspension period ends.) Not only that but those who either haven’t borrowed federal education loans or who currently owe less than $10,000 might find themselves benefiting from loan forgiveness before making a payment.