President Trump signed an executive action Aug. 8 that continues the moratorium on monthly student loan payments through the end of the year. It directs Education Secretary Betsy DeVos to let borrowers temporarily suspend student loan payments because of economic hardship, but unless the Education Department overrides a few of their rules, some types of loans may still begin accruing interest after Sept. 30, and some borrowers may be denied relief altogether. Here’s what you need to know.
1. Most but not all federal loans are eligible for deferral, while private loans are not.
Federal loans comprise about 90% of student loans, and are eligible for the payment suspension as long as they are owned by the U.S. Education Department. Some federal loans issued under the Federal Family Education Loan program, which was discontinued in 2010, are owned by commercial lenders and others that don’t include the Education Department. Borrowers with these loans can’t take advantage of the suspension unless they consolidate their loans into a new loan, which is not always a good option.
2. If your loans are not eligible for deferral, you still have a few options, but some come with substantial drawbacks.
If your loans are subsidized Stafford loans that aren’t owned by the Education Department, and you are unemployed or experiencing economic hardship, you can request a deferment, which would allow you to suspend payments, and would stop additional interest from accruing. If not, you could request a forbearance, which would suspend the payments but would allow interest to accrue. If you have more than one loan, you can combine them into a consolidation loan, which would qualify for the payment suspension and the interest freeze, but then you’d lose any interest rate reductions you’ve earned for automatic payments, or for making payments on time. Also, if you’re in a loan forgiveness program, consolidating might reset the clock on the 10 to 25 years of payments required before the balance can be canceled, said Mark Kantrowitz, of Savingforcollege.com.
3. Consider where your money is best put to use.
Unless you have accrued unpaid interest, all of the payments you make during this period will be applied to your loan’s principal balance, allowing you to repay your student debt faster. If you have multiple student loans, channel payments to the one with the highest interest rate. But if you have credit card or other debt with a higher interest rate, or if you lack an emergency fund, it’s probably best for you to put your student loans on pause and use your money for those purposes instead, said Heather Jarvis, a lawyer who teaches financial professionals about student loans.
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