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:
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!
Jim, I know you don’t like to make this a political site, but this post is bordering on it. I’m not a Republican (Libertarian) but I’m against forgiving (most) student loans for a variety of legal, moral, economic, ethical, and practical reasons. A rebuttal to his post may be in order.
This has to be the most neutral post on this topic on the web.
Can’t wait to see your more neutral post or whatever rebuttal you think is in order.
My comment was in response to the blaming “mostly Republicans”, while I suspect many more than members of this party oppose it too. And then there’s the possibility (probability?) that this program was floated as lure to the younger voters right before an important election that the Democrats were forecasting to lose big. And it worked. This was the political angle to which I was referring. Hardly neutral, IMHO.
Hi David,
I am not trying to lean one way or the other with this post at all. And, I don’t say that I agree or disagree with republicans blocking student loan forgiveness. I am simply trying to state the how/why of this most recent student loan pause, why student loan forgiveness is paused and what those with student loans need to consider going forward.
Andrew SLA
David,
I must agree with Rex that this post seems to be written from as neutral of a perspective as possible. You seem to be taking issue with the mention of Republicans and Democrats by their party names, and that doing so somehow demonizes or otherwise marginalizes Republicans/conservatives. The facts stand for themselves, and this article reflects that. This is an issue that splits pretty strongly along party lines, just like abortion. To omit that fact would be leaving out a huge piece of the prognostic puzzle.
Neglecting to address the likely influence of the current political environment would do a disservice to anyone hoping to gain insight into their own financial planning. Would you consider it a biased statement to suggest that if Republicans are in power, the taxation structure in this country may take a different course than if Democrats are in power? Do you feel you could develop good medium- to long-term tax strategies without having an idea about the ideological leanings of those who set the tax code?
Clint
Clint, not particularly bias, but definitely political. I certainly take the party in power in consideration, as at my age, a short-term outlook is more important. Maybe to the younger, this is not as big of a deal.
David
Please link a more neutral informative article…..can’t find one?
It’s very clear that if you read the article with an open mind that it’s as neutral as it gets to provide this info.
Andrew is still learning how to phrase things in ways that cause fewer people to be offended. I’ve had 12 years of practice and I still mess it up at times. When I read that line about Republicans and the one about “passing” I thought, “Uh oh, a few people aren’t going to like the way he phrased those”. I was right. The comments on blog posts are more predictable than one might think, at least after penning a few thousand of them and seeing how the audience reacts.
I’m not a fan of forgiveness either. I think it’s a lazy and rewards the wrong type of mentality. But this article is pretty neutral. He’s just analyzing what’s actually happened, not advocating.
S, I’m not suggesting that he was advocating. But in stating the Republicans as the main reason for the delay, he was ignoring the many others who feel the same way. I’d bet if there was a vote on the matter, it’d fail. Let’s see what the Supreme Court says, but some would say this too has become political. My prediction: Thumbs down
David
A Pro Con on student loan policy might be interesting, but it’s hard to do a rebuttal on a post that is just saying what is happening and our best guess of what is likely to happen given current information.
I agree that forgiveness and especially uncertainty in how to manage student loans is bad policy. But it is also extremely beneficial to our primary audience. So I have mixed feelings about it. And as Andrew mentioned, the student loan holiday is worth far more to our audience than $10K in forgiveness.
Your repeated use of the word “pass” in relation to Biden’s announced pandemic student loan forgiveness initiative is misleading and implies a vote by the legislature. Pandemic student loan forgiveness is a unilateral executive branch action—there is no voting—therefore nothing did or will “pass.”
“…some have already been notified that they’ll qualify if the forgiveness passes.”
“This is another reason why Biden and his cabinet are working at a breakneck pace to pass this forgiveness.”
“Will the Student Loan Forgiveness Pass?”
“It is anyone’s guess right now if the courts will allow this to pass.”
You’ve also got the national emergency declaration backwards. The executive declares the national emergency (and subsequent extensions). There is no vote—nothing to “pass.” Congress can only vote to end a national emergency.
“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.”
What makes you think Biden will no longer “be able to use the power of the pen” and that the national emergency declaration won’t be extended again?
The emergency might be extended. The only thing to stop it is political pressure. Again, our crystal balls are cloudy and this represents our best guess of what is likely to happen. Right now RSV and the antibiotic shortage seem like bigger emergencies than COVID and they haven’t been declared an emergency. Our local peds hospital just cancelled all its non-emergent surgical cases because all the beds are full of RSVers.
“Pass” probably isn’t the right word. We think it is likely that the Supreme Court will declare this action by the administration to be unconstitutional. First because we think it is. And second because, cynics that we are, we think a supreme Court ideologically divided 6/3 is likely to agree with us. But we respect the right of others to have different opinions on this subject and we’ll all just have to wait and see what the courts do.
Hi Nicolas,
I appreciate the feedback and agree “pass” probably isn’t the right word because this has been done through executive action rather than through our legislature.
IMO I think this most recent national emergency is going to end in January 2023. With the current national emergency expiring January (assuming it does), Biden would no longer be able to enact widespread changes on student loans (like he has done) through executive action such as pausing payments and interest. Obviously, if another national emergency occurs (or the current is extended further) he or any future president could enact student loan changes like the pauses, waivers and maybe even student loan forgiveness.
Andrew SLA
Andrew, an imaginative administration will always be able to find a suitable national emergency to explain the need to enact an executive action (garner more votes). There’s always the handy Global Warming.
Regardless of which side of the morality argument one stands for student loan forgiveness, I think most would agree that back in 2020 when the covid-19 pandemic hit, most folks were hit pretty hard. The intent of temporarily pausing student loan payments for most in this country (even if not everybody in this audience) was reasonable and, on some level, justifiably moral. If people are worried about losing their jobs during a once-in-a-life pandemic, and many did, then pausing student loan payments temporarily across the board feels morally justified to me. I think it truly was an emergency for many.
On the other hand, a hypothetical exploitation of “the handy Global Warning” to do mental gymnastics to further pause student loans would not be moral. As such, the very fact that one would see these two actions on the same level of the spectrum/argument at hand, tells me everything I need to know about this post/opinion.
This article was fair, helpful and factual. Agree that any mention of the D or R word, even presented factually, is risky for the reasons already mentioned.
Not sure 3+ years feels very temporary. 3 months until the economy rebounded? Sure. I could get behind that.
I think that frames it well. Makes me conclude that the length of the underlying emergency (in this case pandemic) should largely determine the length of the temporarily relief. I vote 18 months in this case would have been close to right. For many of us (this affects me) in this crowd, it won’t matter much for a variety of reasons. Despite feeling authentically guilty that I haven’t started paying back yet (and racking up $0 payments for PSLF), it just means I’ll have the opportunity to donate to charity more when I’m older. That is, if I hold myself morally accountable, since nobody else is given your point about “3+” years now feeling too long (which I agree)
Your neutral post is addressing an audience of student loan borrowers. It did not incorporate those people who don’t benefit who are not borrowers; for instance the tax payers who didn’t go to college and didn’t take a loan, or those who successfully completed college without debt. There seems to be a fairness question that is not addressed in the blog since the people who are paying for the student debt forgiveness program are not mentioned in the article.
The post isn’t a discussion or argument about whether these policies are good or bad. It’s just a descriptive piece about what the policies are.
I agree with you about the fairness issue.
I think that frames it well. Makes me conclude that the length of the underlying emergency (in this case pandemic) should largely determine the length of the temporarily relief. I vote 18 months in this case. For many of us (this affects me) in this crowd, it won’t matter much for a variety of reasons. Despite feeling authentically guilty that I haven’t started paying back yet (and racking up $0 payments for PSLF), it just means I’ll have the opportunity to donate to charity more when I’m older. That is, if I hold myself morally accountable, since nobody else is given your point about “3+” years now feeling too long (which I agree)