Most federal student loans have been in an administrative forbearance status since March 2020 as a result of the CARES Act legislation. While in forbearance, borrowers are not required to make monthly payments and are also not accruing interest because of an additional provision that has set federal student loan interest rates to 0%. These provisions have been extended and will be in place until (at least) September 30, 2021.
What does this mean for borrowers? Any payments made while in this forbearance will go directly to loan principal thus reducing the balance faster and allowing borrowers to get out of debt sooner. Borrowers do not have to make full payments, or even monthly—any extra amount paid helps. Normally, borrowers must work with their servicers to apply any extra payments to principal, but it is much easier during this unique period of 0% interest as it will happen automatically.
If a borrower was in forbearance or delinquent prior to when the CARES Act provisions were enacted— they may have already accrued interest. Any payments made now, could reduce or eliminate that accrued interest before it capitalizes (added to the principal balance) when repayment is once again required.
Borrowers in default on federal student loans have effectively been benefitting from a time out in collections. Defaulted borrowers should be proactive and take advantage of the remaining months of this forbearance period and make a loan rehabilitation agreement aimed at correcting the default.
Alternately, if a borrower has significant private student loans or even credit card debt with higher interest rates, now is a great time to try to reduce those loan balances by possibly using extra cash flow to pay down private loans instead of focusing on their federal student loans. Borrowers will need to work with their private loan servicer to apply any extra payments to principal and maximize interest saved.
It is not often that borrowers are offered periods of 0% interest (perhaps a once-in-a-lifetime opportunity!) and no required payments. So remember, any payments made now will reduce federal student loan principal and allow borrowers to get out of student loan debt sooner, so this opportunity is not to be missed!
