Federal Loans Are Paused - Should You Pay?

October 7, 2020

As of mid-August 2020, payments have been suspended without interest for federal student loan borrowers. This pause on payments, called forbearance, will last for the remainder of 2020, ending December 31. This means that most students don't have to start making payments on their student loans again until January of 2021, which many see as much-needed relief during the ongoing pandemic.

Why Have Federal Loans Been Paused?

Like so many other unexpected changes this year, the reason behind the pause is, of course, the coronavirus pandemic. 

Back in March of 2020, the period when the pandemic started to escalate in severity on a global scale, Congress passed a $2.2 trillion stimulus package called the Cares Act. As part of the package, federal student loans owned by the US Department of Education were suspended for six months. Now six months on, President Trump has extended the suspension until the end of the year by executive order.

Should I keep Paying Anyway?

Before we continue, it's important to reiterate that the suspension only applies to federal loans. If you have private student loan debt, this change will not apply to you, and you will need to keep making your repayments as usual. But what about everyone else? Should you keep paying?

If you are financially stable and want to keep paying your student loans, you should keep paying. This is a pause, not forgiveness, so your debt will still be waiting for you on the other end; you just won't accrue interest for the next few months. However, if you are currently working reduced hours or have lost your job entirely, taking a break from paying your student loans can help you divert funds to more urgent areas. For example, you will have extra cash to spend on utility bills, groceries, or any essentials you need for starting a new job.

The type of repayment plan you have should also factor into your decision. If you are on a standard repayment timeline, for example, a 10-year timeline, you may consider continuing payments. Additional payments can help you reduce your debt faster.

However, if you are enrolled in an income-driven repayment, it might not make sense.  If you plan to make payments for up to 25 years until your loan is forgiven, then the additional money you have right now may be better spent elsewhere. However, you could still pay if you want to lower your total interest on top of your principal. 

For people seeking Public Service Loan Forgiveness (PSLF), the memorandum isn't clear about whether nonpayments will also count toward PSLF during the extension. During the original six month forbearance, people working a qualifying employer could work towards PSLF without issue. You may want to consider making payments for the remainder of the year if this applies to you unless more details are announced.

If you want to keep paying, but your income has changed, then consider lowering your payments to something more manageable. Financial decisions aren't always an all or nothing calculation. You can still make payments if you want to, but make it work for your situation and future.

Rahul Iyer