Federal student loan borrowers face payment dilemma

Here’s one thing federal student loan borrowers should be aware of: The moratorium on loan repayments, interest accrual and collection efforts has been extended to Jan. 31, 2021.

The one-month extension was approved by the U.S. Department of Education on Dec. 4. The payment freeze was first introduced in March and later extended to the end of the year.

What’s not known is whether Congress — acting in bipartisan spirit — will extend the pause beyond the end of January. President-elect Joe Biden has said he supports delaying payments through September 2021.

The uncertainty is especially confusing for recent college graduates from the class of 2020 who normally would be starting before year-end to repay federal student loans for the first time.

If and when policymakers make a decision on the repayment holiday, it could be a rocky time for borrowers and student loan servicing companies alike, said Sarah Sattelmeyer, director of the Pew Charitable Trust’s student borrower success project.

“Those who benefited from the COVID-19-related pause will have to simultaneously navigate financial challenges, continued uncertainty and a confusing repayment system when the current pauses are scheduled to end in December,” she said. “This could drive them to reach out to student loan servicers for help in unprecedented numbers, potentially overwhelming the system.”

Sattelmeyer estimates that loan servicers could be inundated with questions from more than 9 million borrowers.

What can borrowers do to be ready for whatever the outcome?

Here are some suggestions from Kevin Walker, chief executive of College Finance.com:

Review your loans. With payments on hold, it’s been easy for borrowers to put federal student loans on the back burner, Walker said. He advises borrowers to “refresh their memory” of all education loans, accounts and loan servicers. Log into your servicer accounts, and verify balances and what monthly payments will be once they resume.

Don’t forget to review any private student loans even though these have not been on pause.

Review your interest rates on each loan.

One way to roughly measure the full impact of borrowing costs is to determine what Walker calls the weighted average interest rate of your entire education loan portfolio.

“A rough way to do this is to multiply the principal of each loan by its corresponding interest rate,” Walker said. “Combine those numbers to get an overall total, then divide that by your total principal balance. The resulting number will be your weighted average interest rate on your whole loan portfolio.”

Consider making extra principalonly payments on the most expensive loan.

One caveat: Check with the loan servicer on how to make extra principal-only payments.

Consider refinancing. Borrowers with relatively high credit scores and steady income are most likely to qualify to refinance their federal student loans. But weigh the pros and cons carefully, and don’t refinance any federal student loans until the moratorium is over, Walker said.

And one last option so you’re completely ready for the moratorium to be lifted, whenever that is ultimately: Review your repayment options, such as income-based payment plans, especially if you think you’ll struggle to repay once the moratorium is lifted.