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Biden extends student loan payment freeze—what experts say borrowers should do

Four student loan experts weigh in on Biden extending the payment pause.

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On Aug. 24, 2022, President Joe Biden announced student loan forgiveness where up to $20,000 worth of federal student loan debt per borrower will be canceled. The federal loan repayment pause will also be extended through Dec. 31, 2022, and those on income-based repayment plans will have lower monthly payments.

Below is the original article published on Jan. 22, 2021.

In one of his first moves in office, President Joe Biden directed the Department of Education on Wednesday to extend the payment pause for federal student loan borrowers until at least October 2021.

Biden's executive order is a continuation of relief that's been in place since the CARES Act passed in March 2020, giving 42 million student loan borrowers a break from making their monthly payments and accruing interest during the pandemic.

Select asked four student loan experts to weigh in on what borrowers should do during this extended forbearance period. Here is their advice on how borrowers should take advantage of this extension during the ongoing pandemic.

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What cash-strapped borrowers should do

The continued interest-free moratorium on federal student loan payments means that you don't have to make your monthly payments through at least September 2021, and any interest accrued during this suspension will also be waived.

Borrowers who are still facing financial hardships brought on by the pandemic should put the extra money they're saving toward high-priority bills that impact their survival, like housing and utilities.

It's also worth taking advantage of this 0% interest period if you're juggling other debt. If you can afford your basics, use the extra money to pay down outstanding balances on high-interest debt, says Travis Hornsby, founder of Student Loan Planner.

"You want to prioritize other debt like credit cards, car loans, mortgages — really anything that actually charges an interest rate," he tells Select.

Higher education expert Mark Kantrowitz agrees: "It might be better to use the money to pay off higher interest rate loans first, which will save [borrowers] more money on interest over the life of the loans."

Because credit cards charge double-digit interest rates, carrying a balance becomes expensive — and fast. Most card issuers compound interest on a daily basis, so interest is added to your balance at the end of every day.

The typical monthly student loan payment ranges between $200 and $299, according to the Federal Reserve. During this forbearance period, you can use that extra $200 or so each month to make a dent in your credit card balances. Given the additional eight months of relief through September 2021, that frees up anywhere from $1,600 to nearly $2,400 (depending on your monthly federal loan payment) that can go toward other debt.

"During this extended payment reprieve, anyone who also has credit card debt has got to pay that down as much as possible," says Gordon Achtermann, a Virginia-based CFP. "After that, build up your emergency fund so that you will have a smooth adjustment when the student loan payments eventually kick back in."

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What borrowers who aren't worried about their finances should do

If you don't have any high-interest debt and you do have an emergency fund, you should continue to make your student loan payments.

With the interest rate set to zero for the duration of the payment pause and interest waiver, any payments that you make on eligible federal student loans will go entirely to chipping away at the principal balance.

"This will help borrowers pay off their loans quicker," Kantrowitz says.

This 0% interest period might afford some borrowers the chance to pay off their loans entirely (depending on how aggressive you can afford to be). Even if you carry a sizable balance that can't be easily paid off in the next eight months, use this time to get ahead and see your monthly payments go further, says Bruce McClary, a spokesman for the National Foundation for Credit Counseling (NFCC).

McClary also suggests using this time to see what private lenders offer for refinancing so you know your options when the payment pause ends. If you pay your loans down substantially from now through September, you might have a small enough balance left over that refinancing could benefit you at that time.

"It may be a good time to see what a more competitive interest rate could do to save you money while taking pressure off of your budget," McClary says. "Even if you don't act now...it never hurts to compare what you have to what is available in the marketplace."

Note that when you refinance with a private lender, you opt out of federal protections. These protections include the ability to qualify for income-based repayment plans, economic hardship forbearance and possible federal loan forgiveness.

"Zero interest on a federal loan is the lowest interest rate borrowers can get," Kantrowitz says. "There's no compelling reason to refinance a federal loan that is eligible for the payment pause and interest waiver into a private student loan until the payment pause and interest waiver expires."

Bottom line

If you are still financially struggling from the economic fallout of the pandemic, use these next eight months to take care of higher-priority bills or your more expensive debt, like outstanding credit card balances.

Though the postponement period on federal student loans has been extended, nothing can be certain beyond the Sep. 30, 2021, date, notes Hornsby. Payments will resume at some point in the not-too-far-off future, and it's likely that student loan borrowers will have to start repayments again Oct. 1, 2021.

"The majority of borrowers need to just enjoy the increased savings or extra payments on other types of debt, and be ready to start making payments again in Q4 of 2021," Hornsby says.

Catch up on Select's in-depth coverage of personal financetech and toolswellness and more, and follow us on FacebookInstagram and Twitter to stay up to date.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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