Trump and Biden froze federal student loans. Should borrowers pay or pause before unfreezing?

For much of the year, the country’s 45 million borrowers with federal student loan debt found themselves in a comfortable vacuum.

This relaxed stagnation began last March when then-President Donald Trump ordered the Department of Education to allow borrowers to stop paying their federal student loans while freezing interest under the coronavirus relief effort. The Biden administration extended that pause through September with a day one executive order.

The move was intended to help borrowers use their money for more pressing expenses like groceries or rent. The more ambitious may have started saving, but a break is no stoppage. As Congress wrangles over President Joe Biden’s $1.9 trillion stimulus package or condemns Trump, borrowers still don’t have answers to their mounting questions.

Among them, how long will the break last? And does it make sense to pay debts now when the possibility of loan forgiveness is on the table?

While the federal government has made it easy for borrowers to skip their payments, it hasn’t made it clear to borrowers what comes next. Pardon may seem the natural next step, but Republicans and Democrats disagree on the fairness of such a plan. This left borrowers to chart their own course, and most took the path of least resistance.

Should you pay off your student debt now or wait?

“In order to make a repayment on your loans, you had to do something proactively,” said Mark Kantrowitz, author of five books on scholarships and financial aid. “Whereas if you did nothing, you were automatically on a payment break and waived interest.”

Travis Smith seems to be one of those proactive people. He chose to use the pause period to aggressively try to pay off his remaining debt of $30,000. This translated into payments of around $2,000 to $3,500 per month.

Smith, a doctoral student at Indiana University in Bloomington who also works in the athletic department, said he and his wife were paying off all their debts when the hiatus began. So they live off his salary and channel his earnings into debt.

“I just got sick of the principal never changing on loans,” he said. “We knew how important it was to be able to overthrow the principal, so hopefully others will recognize that too.”

The principal is usually the initial amount of money a borrower has agreed to repay.

Kaitlyn and Travis Smith have taken advantage of the government’s pause on federal student loan payments to aggressively pay off what they owe. Most borrowers have not made payments in the last 10 months.

Kantrowitz said the zero percent rate means borrowers who make payments can reduce their loans faster. But that doesn’t mean that all borrowers would benefit the most from this route.

In a loan cancellation program? Rethink your payments.

Specifically, those enrolled in loan forgiveness programs may want to rethink their payments. These programs require borrowers to make a certain number of payments before their debt is forgiven. Under the current moratorium, these borrowers have not had to make these payments, but they still receive credit for them every cycle.

“It gives them a partial loan forgiveness,” Kantrowitz said.

Peter Orlowicz, a federal government lawyer, has taken this approach. He said he had about $310,000 in student debt. He is also within two years of canceling his debt under the government’s civil service loan cancellation programme.

This program that allows people to work in eligible jobs for, for example, the government or a non-profit organization. After 120 qualifying payments, the federal government is supposed to cancel the debt. Other government repayment plans require borrowers to make payments based on their income for 20 to 25 years, after which their debt is supposed to be forgiven.

Orlowicz’s payments were around $950 a month, and he said it was easy to decide whether to redirect that money to other costs associated with staying home during the pandemic, including delivery. of food.

“My payments don’t cover much more than interest normally,” he said. “And the amount I would pay during the break will not have a significant impact on the total amount outstanding, I have not seen any benefit in making payments voluntarily.”

For other borrowers, repayment may seem like a moral issue. Nicholas Grayson said the choice was simple to make. The government wasn’t asking for a refund, so it’s not paying.

Grayson, who works at the video game and culture website Fanbyte, said he instead used the money he would have made on his loans to improve his life and that of his partner during the pandemic. This has included making home improvements.

Nicholas Grayson, 25, said he made no payments on his loans and instead used the money to make life easier for him and his partner during the pandemic.  He said he supports the government writing off student debt for all borrowers.

Nicholas Grayson, 25, said he made no payments on his loans and instead used the money to make life easier for him and his partner during the pandemic. He said he supports the government writing off student debt for all borrowers.

Grayson, who went to the University of San Francisco, said he owed about $175,000 in student debt. About $25,000 of that amount is in his name, and the rest is in the form of federal loans his mother took out for him.

He said he was on an income-driven repayment plan. But he and other young minority borrowers he knows approach their debt with the following mindset: “either we die before the loans are paid off or they will drop when we are in our 40s”.

Previously reported: Biden to continue payment freeze, ask Congress to wipe out debt

Is student loan forgiveness the next step?

President Biden avoided promising to cancel student debt via executive action, and instead said he supported Congress in canceling $10,000 of student loan debt.

Advocates for student borrowers have pushed Biden to write off the debt through executive action, including new Senate Majority Leader Chuck Schumer, D-New York, and Elizabeth Warren, D-Massachusetts. They pushed a plan that would forgive $50,000 in student loan debt.

And a recent poll by Morning Consult found just over half of adults said they would strongly or somewhat support a $10,000 loan forgiveness.

That support was more popular among Democrats, nearly 75% of whom strongly or somewhat support the measure, compared to Republicans, 54% of whom oppose the plan.

Betsy DeVos, the former education secretary, also opposed widespread loan cancellation. In December 2020, she said it was unfair to ask Americans who didn’t go to college to subsidize the costs of those who did. This echoes bipartisan criticism of loan forgiveness more broadly that loan forgiveness would unfairly benefit those who have a college education and generally earn more as a result. And forgiving the debt once would not prevent it from accumulating in the future.

Reports show that the average graduate of a four-year program has about $30,000 in student loan debt, but the majority of borrowers who default on their loans have less than $10,000.

There is approximately $1.56 trillion in the nation’s federal student loan portfolio.

A $10,000 discount wouldn’t necessarily translate to lower monthly payments, Kantrowitz said. (Although borrowers looking for lower monthly payment options have a suite of income-based repayment programs they can enroll in.)

For Grayson, $10,000 in forgiveness feels like a drop in the bucket. His income-driven plan would qualify him for a rebate in 20 years, but payments during that time, he said, will affect the quality of his life.

He said the government is likely to cancel most of what he owes, so why not forgive him now? And that’s a question more borrowers are likely to ask themselves when and if their payments resume.

This article originally appeared on USA TODAY: Biden suspends student loans, interest: Will the debt go away? Do I have to pay?

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