Tax Law

When Will The Deferral On Federal Student Loan Payments End?

If the economy is starting to improve, people should be expected to start repaying their loans and other deferred expenses.

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Recently, the Department of Education extended the suspension of federal direct loan student loan payments and interest accrual until October 2021. The deferral began in March so federal student loan holders will not have to pay their usual monthly payments for 18 months. This was welcome news to those who have lost their jobs or had a reduction of income due to the COVID-19 pandemic.

And to those who have not been affected financially, the forbearance gave them more options with their new disposable income. They can continue to pay their student loans and reduce the principal faster. Or they can save their money for an emergency, put money away for retirement, buy a car, or hoard the Pokemon Happy Meals at McDonald’s.

But the forbearance cannot last forever and repayment will resume when the economy shows signs of continuous improvement. In the past month, COVID-related hospitalizations have decreased and vaccinations are increasing. Eventually schools will reopen, and businesses will return to their offices to work. So it appears that the economy is on the path to recovery.

Of course, even if everyone is vaccinated and the economy recovers, not everything will be back to the pre-COVID days. Some businesses have closed for good, others have relocated due to high taxes, and others are adopting permanent work-from-home programs to cut costs. Certain jobs are less desirable due to the likelihood of being exposed to someone infected with COVID-19.

And there are some people who were struggling financially even before the pandemic and will be unable to pay once repayment restarts.

Those who are in financial purgatory can apply for income-based repayment plans. Or if they are already in such a plan, they can request an adjustment based on their recent paycheck (or lack of one). However, there will be a few people who will have to give up their Tesla leases or get a roommate to split the monthly rent bill.

So the question is should the government make this deferral extension the final one? Of course, it depends. If there is a new super-COVID virus that is resistant to all current vaccines and has caused more government closure orders, then yes, another extension would be appropriate.

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On the other hand, if the economy is starting to improve, people should be expected to start repaying their loans and other deferred expenses. Because if the deferrals continue, it is more likely that people will adapt their lifestyles around it and eventually become dependent on it thus making it harder to resume repayment.

As mentioned earlier, those who are not adversely affected financially will have more options with their money. This will exacerbate income inequality since those with higher incomes can choose to put their money into savings or investments while those with lower incomes will not have that option since their limited income is only enough to pay for food and shelter. And maybe medicine.

Some people will be anxious and upset on learning that they have to resume repayment. For some, their emotions are understandable since they are unemployed or underemployed and are unable to pay. But there are some who will be upset because they needed more time to achieve some of their financial goals. A few, having become accustomed to the deferral and living paycheck to paycheck, will be hoping that President Joe Biden and Congress will forgive their student loans.

If the Department of Education decides to end the deferral, this news must be announced immediately so people can have time to prepare for repayment or other arrangements. If this deferral is the last one, then ideally the announcement should be made in August at the latest.

Second, the government should provide assistance to ensure that debtors are able to pay a comfortable amount through the income-based repayment program. And they should give people additional time make any reasonable lifestyle adjustments.

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While the extension of the federal student loan deferral is good news, once the economy starts to recover, debtors should be prepared to resume repayment. An unnecessarily long deferral will result in dependence. However, those who are struggling financially should be given assistance on setting up a payment plan that allows them to meet basic living expenses.

If you want to learn more about managing student loans, including dealing with collection agencies, setting up an income-based repayment plan, and forgiveness options, I am giving a virtual seminar this Thursday, February 18, at 6:30 p.m. Pacific Standard Time. Click here for details. I hope that the seminar will provide attendees with a repayment plan for when the deferral eventually ends.

Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at sachimalbe@excite.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.

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