What to Do About Student Debt When Covid Relief Ends

(Bloomberg Opinion) -- A particular hope filled the air (or at least social media) after Biden’s swearing in — the hope that student loan debt would be cancelled. Six months later, however, there are no clear signs this is happening. Even the $10,000 student loan debt cancellation Biden himself advocated prior to his election has yet to come to fruition.

This matters because more than 40 million Americans are on borrowed time before having to resume payments on federal student loans. 

On March 27, 2020 the CARES Act suspended payments and collections on defaulted student loans, and brought interest rates down to 0% until Sept. 30, 2020. After a few extensions, this is set to expire on Sept. 30 of this year. 

The relief has been critical for millions during the pandemic, but it’s cost the U.S. government an estimated $53 billion, according to the administration’s recent proposed budget. It’s predicted to result in $68 billion in long-term losses, due to factors such as increased enrollment in income-driven repayment plans and potential defaults.

The reality is, the federal government is not going to cancel the more than $1.7 trillion in student loan debt. At some point, borrowers will have to start making regular payments and see interest accrue on what they owe.

Unfortunately, options for debtholders are fairly limited, especially considering how hard it can be to get federal student loan debt discharged, even in the case of bankruptcy. Failure to pay and ending up in default can eliminate your eligibility for federal payment plans such as income-driven repayment or Public Service Loan Forgiveness. Perhaps more frighteningly, it can lead to your tax refund and other federal benefits being seized.

Although you can hold out hope for another extension, it’s a good idea to start preparing to pay off that debt again.

Simulate a budget. One of my favorite tactics when expecting a change in expenses is to run a simulation. It’s a strategy my husband and I have used to anticipate rent increases; others have used it during pregnancy to get used to the costs of daycare ahead of time. 

The process is straightforward: We incorporate the anticipated expense into our household budget several months prior to actually paying it. We put the money away each month into a savings account.

In the case of student debt, you can rework your monthly budget to account for your pre-Covid student loan payment. The amount you’ll have to pay in October may be different, but this at least gives you a baseline number.

For example, if your income is $2,750 per month post-tax, create a budget assessing your monthly essential expenses like housing, transportation, food, insurance and medicine. And then add your student loans back in. Can you handle your loans on top of your necessities? If so, start tucking this money away.

Next create a budget with your essentials and your “wants” — all those non-essential items like dining out, entertainment, memberships and so on. Then add on student loan payments. If you have enough to cover everything, that’s great — now is the time to get used to that regular outflow of cash again. If you have enough for needs but not for all the wants, you’ll need to make some decisions about what you value most to keep in your budget.

Should your bare essentials budget not be able to cover the student loan payment, however, then it’s time to assess income-driven repayment plan options. You should also check with your servicer to see if you’d be eligible for standard deferment or forbearance once the Covid-19 emergency relief ends. 

Reassess your options. Income-driven repayment (IDR) plans and forgiveness programs are one advantage of federal student loans. IDR plans calculate how much you can afford to pay relative to your actual income, which helps release some pressure. And after 20 to 25 years of payment, any additional balance is forgiven.

Public Service Loan Forgiveness requires making 120 qualifying payments while working a qualifying job in public service. After 10 years, the balance on your direct loan is forgiven. (Those interested in PSLF must consolidate to a direct loan in order to be eligible, which often means enrolling in an IDR plan.)

If you’re enrolled in an IDR and experienced a loss of income or employment during the pandemic, you can ensure that your most recent income is being used to determine your monthly payment. This is known as recertifying, and it can often be done digitally with your tax information is used. You are required to recertify each year when on an IDR plan regardless of change in income or marital status.

Those who got married, which can impact income being counted, or saw an increase in income during the pandemic, may want to also recertify to get a clear picture of how to budget for repayment after the suspension.

If you weren’t enrolled in an IDR plan, consider doing so if the overall cost of a monthly student loan bill will be a struggle. Enrolling will not change the Covid-19 emergency suspension (forbearance) of loans, according to the StudentAid.gov website. 

The suspension period still counts as qualifying payments towards Public Service Loan Forgiveness and IDR plans, even though payments weren’t being made. This means that you haven’t lost a year and a half of time on your repayment journey.

For PSLF, StudentAid.gov explains you must have a direct loan and work full-time for a qualifying employer during the suspension (forbearance). Assuming those criteria are met, you’ll get credit as though you made on-time monthly payments. Those who lost employment that qualified them for PSLF are likely no longer receiving credit unless you find new, qualifying employment in the public service sector.

There is one silver lining for borrowers who are close to having student loan debt discharged from a forgiveness program. President Biden removed tax penalties for forgiven student loans until December 25, 2025. Previously, your forgiven student loan debt would be treated as income by the IRS and borrowers sometimes received tax bills. Those who have debt forgiven before December 25, 2025 will not be hit with the tax penalty.

The idea of having to start repaying student loan debt is no doubt stressful and further relief may still present itself. But for now, it is important to start strategizing about how to make the right moves for your situation.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Erin Lowry is the author of “Broke Millennial,” “Broke Millennial Takes On Investing” and the forthcoming “Broke Millennial Talks Money: Stories, Scripts and Advice to Navigate Awkward Financial Conversations.”

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