[Editor's Note: Three months from now, the WCI community will gather in sunny Phoenix for the Physician Wellness and Financial Literacy Conference (WCICON23), and we want you to be there! Whether you’ve attended in the past or have only considered it, here’s what to know: you’ll kick-start your financial plan and learn how to create lasting wealth while discovering strategies to combat burnout. Plus, we knock off early every day to play pickleball, lounge by the pool, and hang out with like-minded physicians. Register for WCICON23 today, and spend the next three months imagining just how great it’s going to be.]

 

By Andrew Paulson, CSLP, Lead Student Loan Consultant and Co-Founder of our partner site StudentLoanAdvice.com

The Biden Administration last week extended the student loan holiday for the eighth time. This pause comes on the heels of ongoing legal battles with the Biden student loan forgiveness program announced back in August. Though the last extension was supposed to go through the end of 2022, the student loan holiday is now set to expire on June 30, 2023, with payments resuming 60 days after. It's a confusing way of saying that payments will start on September 1, 2023. However, if student loan forgiveness ($10,000 for most and $20,000 for Pell Grant recipients) is settled prior to June 30, payments will resume 60 days from that date. In all likelihood, though, it appears student loan forgiveness will continue to be held up in the court system at least until the summer of 2023.

Let's dive into why payments are paused and why loan forgiveness is blocked, and how to think about this for your student loan plan.

 

Why Are Student Loan Payments Paused Again?

Student loan payments are paused again due to the ongoing legal battles with student loan forgiveness. The Biden administration anticipated forgiveness would start benefitting borrowers at or before the time payments were set to resume in January 2023. To date, more than 25 million applications have been received, and some have already been notified that they'll qualify if the forgiveness passes.

With the current lawsuits likely to go well into the summer or beyond, the administration would like to continue helping borrowers with student loan repayment—hence the additional pause. One of the Biden administration’s campaign promises was to cancel student loans. Although no widespread student loan forgiveness has been issued, there has already been a significant reprieve for federal borrowers who haven’t had to make payments for the better part of three years. In addition, interest rates have been at 0%, so there has been no growth on their loans. This sort of forgiveness is harder to track and is particularly beneficial for borrowers with large balances. In some cases, it far eclipses the $20,000 of potential student loan forgiveness.

Example: An orthodontist with $500,000 of student loans at a 7% interest has saved nearly $100,000 in interest during the holiday. That is about $35,000 in interest savings per year.

Also, the Biden administration is coming off a successful midterm campaign. Midterms are usually a significant loss for the sitting president and their party in the legislative branch. However, the results were quite favorable for Democrats and much less of a red wave than Republicans anticipated. Young voters were one of the keys to a positive midterm for the Biden administration. Young voters have a much higher likelihood of student loan debt than their older peers. Education Data states that those who are 39 years and younger hold 54% of all student debt. It makes sense that Biden will continue with favorable loan policies to maintain the political capital gained thus far from the student loan holiday and the announcement of student loan forgiveness.

More information here:

The Student Loan Holiday Has Been Extended Again; Should You Pay Off Your Debt Anyway?

 

Why Is Student Loan Forgiveness Blocked?

Simply put, student loan forgiveness is blocked because some politicians, mostly Republicans, disagree with it. Challengers have issued a variety of lawsuits questioning the legality of the president’s action. Recall, President Biden is employing his executive authority under the HEROES Act to forgive student loan debt. The HEROES Act was passed after 9/11 to expand the presidential powers in times of national emergency. COVID-19, categorized as a national emergency, is the catalyst to use the HEROES Act to issue widespread student loan forgiveness. January 2023 is when the national emergency expires. This is another reason why Biden and his cabinet are working at a breakneck pace to pass this forgiveness.

The main message these lawsuits are pushing is that the president lacks the legal authority to create and issue broad student loan forgiveness via executive action without going through Congress. Congress could enact this level of broad student loan forgiveness. But it’s well understood Congress is politically divided, and it would not support a bipartisan action regarding this matter.

 

What Does Another Student Loan Pause Mean for Borrowers?

Another payment and interest pause for borrowers means:

  • More $0 payments
  • Additional $0 payments counting as credit for loan forgiveness
  • More months at 0% interest rate
  • Income certification is postponed

 

Who Benefits From an Additional Student Loan Pause?

This most recent pause will help almost all federal borrowers. In particular, it benefits those who are pursuing a federal loan forgiveness program since you will continue receiving credit for your forgiveness track—whether you are pursuing PSLF or IDR forgiveness—at $0 payments. Pretty sweet deal. For those in income-driven repayment (IDR), it’s likely your income has gone up since you last had to send in your tax return (or paystub) in March 2020. With this latest pause, income certification will likely be pushed back again, which would allow for affordable payments resuming in September 2023. The earliest anyone had to recertify under the last pause was July 2023. Expect the recertification date to be postponed until January 2024 or later.

Extending the student loan holiday also gives borrowers in difficult financial circumstances more time to make a plan for addressing their student loans.

On the surface, this student loan pause looks like a win-win. But there are some who might be left scratching their head about what’s next. Here’s who could potentially not benefit from this recent pause.

 

Who Doesn't Benefit from an Additional Student Loan Pause?

Borrowers who likely don’t benefit from this pause are those who are looking to refinance their student loans. Student loan refinancing used to be the surefire way to pay down your student loans if you weren’t going for PSLF. Reason why? Interest rates in the private markets were 1%-3% for those with good credit and attending/practicing level incomes. Federal rates hover around 6%-8% for graduate and professional degree programs. Which means you could cut your rate in half or even more through refinancing.

Here's an example of how you USED to save through refinancing. Take two doctors with student loans of $300,000 on a 10-year term. Doc 1 has a 7.5% interest rate (didn’t refinance loans) and Doc 2 has a 2.5% interest rate (refinanced when rates were low in 2021).

Doc 1 has a significantly higher monthly payment and, due to the higher interest rate, pays around $88,000 more in interest over the life of the loan than Doc 2. Looks pretty black and white that Doc 2 got the deal you’d want. However, this is an oversimplification. This example assumes we just put the money we don’t pay toward our student loans—the excess $88,000—in a bank account or under the mattress.

We must consider what would happen if you put this money to work. What if you took the difference in monthly student loan payments ($3,561-$2,828) of $733 and you invested in boring old index funds that returned 7% per year?

Formula =FV(7%/12,10*12,-733,0,0) = $126,871

In 10 years, you’d have another $127,000 to your name—$88,000 of that is the money saved with the lower interest rate, and the remaining $39,000 is investment appreciation or the magic of compound interest through investing. That means you paid less on your student loans and increased your net worth in the process. Win-win.

This sounds great, but where do you get interest rates like that today? Thanks to rising interest rates, those no longer exist in our current rate environment. Yes, you can still find rates lower than what some of you are paying federally, but it’s not as cut and dry as it used to be. You might only bring down the interest rate a half percent or even a quarter of a percent. And, at that slight difference, does it make sense to throw away the federal programs? Probably not. What if another $20,000 of loan forgiveness comes out? Or the new income-driven plan drops payments from 10% of income to 5% of income? Or the loan programs get rid of interest capitalization? Well, you can’t qualify for those once you’ve refinanced. You totally shut the door on federal loans.

If you’re looking to refinance, make sure it’s an obvious decision and that you don’t have the smallest sense of regret to wait or consider alternatives. If you’ve come to the conclusion to refinance, it’s probably best to refinance now before the Fed raises rates again in December. You’ll look smart in the future if rates keep going up, and you can still benefit if rates go down in the future by refinancing them again.

More information here: 

Pay Off Debt or Invest?

 

Will the Student Loan Forgiveness Pass?

It is anyone’s guess right now if the courts will allow this to pass. Our current thinking is that student loan forgiveness will not come to fruition. The reason being is that the Supreme Court has decided it will hear arguments on the matter in February 2023 (with a decision being announced four months later). The Supreme Court is a majority conservative, and it will probably rule Biden's plan as unconstitutional and side with one of the lawsuits filed.

 

Will Student Loan Payments Be Paused Forever?

We don’t think payments will be pushed again because Biden won’t be able to use the power of the pen (executive action) to continue pausing payments. The national emergency declaration, which has granted the president this authority, is ending in January 2023. The only way the payment pause continues in the future or indefinitely is if the US stays in a state of national emergency. Without the justification of a pandemic like COVID or unless the US gets involved in a war, it's inevitable that payments will resume. It's similarly unlikely that Congress would pass another extension.

 

2022 has brought an unprecedented number of changes, pauses, waivers, etc. With all this uncertainty, it can be difficult to know how to take the first step in crafting your student loan plan. StudentLoanAdvice.com has a team of professionals who live and breathe student loans every day. If you’re confused about how to best pay down your loans, schedule a consult with one of our student loan experts. You can rest assured we’ll help you chart your optimal path forward to ensure you won't pay a penny more than necessary.

Does the student loan holiday extension benefit you? Would you like to see it paused forever? Do you think the courts will allow the student loan forgiveness plan to move forward? Comment below!