Should You Pay Student Loans During COVID?

The COVID-19 pandemic significantly impacted student loan obligations. This period presented new considerations for borrowers managing their finances. Understanding the conditions and consequences of student loan payments during this time can inform future financial planning.

Understanding the Federal Student Loan Payment Suspension

In response to economic disruptions from the COVID-19 pandemic, the federal government implemented a payment suspension for most federal student loans. This measure placed eligible loans into forbearance. During this period, borrowers were not required to make monthly payments, and a 0% interest rate was applied to their balances.

The suspension covered federal student loans held by the Department of Education. This included Direct Loans, and some Federal Family Education Loan (FFEL) Program and Perkins Loans. However, not all federal loans qualified for this relief. Commercially-held FFEL Program and Perkins Loans not held by the Department of Education were excluded from the payment pause.

The federal student loan payment suspension began in early 2020 and was extended. Interest accrual resumed on September 1, 2023, with borrowers’ first payments due in October 2023. Collection activities for defaulted federal loans were also suspended during this period.

Impact of Making Payments on Federal Loans

For borrowers who chose to continue making payments on their federal student loans during the suspension, every dollar paid went directly toward reducing the loan’s principal balance because the interest rate was 0%.

This direct application of payments to principal could significantly accelerate the loan’s payoff timeline. By consistently chipping away at the core debt, borrowers had the opportunity to reduce the overall interest that would accrue over the loan’s lifetime once payments and interest resumed. Making payments during the suspension period did not negatively affect a borrower’s loan status; accounts remained in good standing.

Impact of Not Making Payments on Federal Loans

Borrowers who opted not to make payments on their eligible federal student loans during the suspension period faced no penalties. Loan accounts remained in current status, and credit reports were not negatively impacted by their choice to utilize the payment pause.

A significant aspect of the suspension was that no interest accrued on eligible federal loans. This ensured that the principal balance of these loans did not increase while payments were paused, preventing the accumulation of additional debt. The time spent in this payment suspension also counted toward various loan forgiveness programs. For instance, eligible months during the pause counted toward the 120 qualifying payments required for Public Service Loan Forgiveness (PSLF). Similarly, the suspended period contributed to the payment counts for Income-Driven Repayment (IDR) plan forgiveness, allowing borrowers to progress toward loan discharge without making payments.

Considerations for Private Student Loans

The federal student loan payment suspension did not extend to private student loans. These loans are issued by banks, credit unions, and other private lenders, and their terms and conditions are set independently. Therefore, private student loan borrowers remained subject to their original repayment schedules and interest rates throughout the pandemic.

While the federal relief did not apply, some private loan servicers and lenders offered their own forms of assistance. These options might have included temporary forbearance or deferment, which could allow borrowers to pause or reduce payments for a limited time. However, such relief was typically granted on a case-by-case basis and was not uniform across all lenders. Moreover, interest often continued to accrue on private loans during periods of forbearance, potentially increasing the total amount owed. Borrowers with private student loans experiencing financial hardship during the pandemic were generally advised to contact their specific loan servicer directly to inquire about any available relief programs.