Student Loan Freeze

By 213 Strategic Partners on February 3, 2022

*Since releasing this post, on April 5, 2022, the Biden Administration extended a pause on federal student loan repayment through August 31, 2022. The repayment freeze, which has been in place since the beginning of the COVID-19 pandemic, had been scheduled to expire on May 1, 2022.

On December 21, 2020 President Biden announced that the federal freeze on student loan repayments and interest accumulation would continue through May 1st, 2022. We’ve seen several student loan moratorium extensions since it was enacted in March 2020. It is unclear if additional postponements are to be anticipated, but the White House has suggested this could be the final deferral. Regardless, we’ve received several inquiries from clients with student debt around how they should be thinking about this unique period and what they can be doing to take advantage of the break. Here are some key considerations that should be top of mind for debtholders.

• A freeze is not free: When viewed in a vacuum, it needs to be mentioned that no financial benefit exists to deferring student loans. Of course, this lens isn’t realistic, and millions of citizens were able to reallocate student debt servicing proceeds to fund more pressing needs over the last years. But economic data points such as higher wages and lower unemployment figures indicate the notion that loan repayments should be reprioritized. With a more volatile stock market, now might be a good time to resume monthly payments if you haven’t already.
• What does the math say?: Suppose a former student entered March 2020 with $50,000 of debt at a 5% interest, to be repaid in 15 years at $395.40/month. Here are the theoretical balances through April 2022 with three different scenarios:
  • $395.40 continued monthly payments throughout, no forbearance: $44,874.38
  • $395.40 payments resumed March 2021, forbearance through April 2022: $44,464.40
  • $395.40 continued monthly payments throughout, forbearance through April 2022: $39,719.60

Essentially, there are two forms of interest savings to consider. The former student who was able to make some or all payments during the freeze period saves interest with 100% straight principal payments. But they are also accumulating less interest in later years when the moratorium period ends. If no payments were made with the original terms ($50K debt, 5% interest, 15-year payoff period) during the forbearance period, $21,171.34 of interest will ultimately be paid. But in the examples where $395.40 monthly payments started in March 2021 or continued during the entirety of the pandemic, either $17,224.95 or $14,176.84 will end up being paid in interest, respectively. And the good news for those that haven’t made any repayments over the last two years? The math works out the same for lump payments in excess of a stated monthly amount.

• PSLF and Employer Assistance considerations: Several holders of federal student debt may qualify for the Public Service Loan Forgiveness (PSLF) program, which extinguishes student debt for government employees after 10 years. It was recently announced that payments made during this freeze period would in fact count towards the 120 separate monthly payments that allow student debtholders to become eligible for PSLF. We would recommend that those tracking towards PSLF-eligibility not waiting until the forbearance period ends. More information can be found here.

Several employers also offer financial assistance for their employees tackling student debt. If your employer has a reimbursement program, it would be advisable to take advantage of the program to maximize the benefit. Another idea floated by lawmakers is to establish a provision where a student loan repayment would be matched by an employer contributing to a 401K. If passed, this double benefit would be a no-brainer. 

• Loan forgiveness is possible, but don’t count on it: President Biden has adamantly stated that he’d like to eliminate $10,000 of student debt per person. However, this pledge has been met with mixed feelings, as some perceive this as “unfair” to students who have already repaid their debts. Some borrowers are reducing their loan balances to this range and will wait to see if any further activity out of D.C. could impact them. At this time, although the proposed idea of loan forgiveness is possible, we don’t recommend you fully rely on further governmental assistance.

The bottom line: There are several considerations for students holding federal debt, but the opportunity for meaningful interest savings still exists for at least another 60 days. We would encourage factors such as total debt owed, interest rate, short and intermediate-term financial goals, loan-forgiveness eligibility, and other liabilities to all be considered when formulating a plan that makes the most sense. Please feel welcome to contact our team for additional guidance, questions, or clarity.

Tom Macaluso, CFA®
Financial Analyst & Advisor | Sarian Strategic Partners