Student loan payments returning Feb. 1 — how to prepare financially

Federal student loan borrowers anticipating the return of their regular student loan payments Oct. 1 can once again breathe a sigh of relief: The pause will continue through Jan. 31, 2022, the Department of Education announced Friday.

The department says the extension — the fourth since March 2020 — will be the last. As with previous extensions, this forbearance does not apply to private student loans.

The move means that by Jan. 31, there will have been nearly two years of payment relief for federal student loan borrowers.

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The forbearance began as part of the original coronavirus relief bill, known as the CARES Act. Borrowers received it automatically, and the interest rate on their balances was set at 0%. The pause gave student loan debtors time to deal with lost jobs, juggle finances to pay for food and shelter, or build up emergency savings.

In the Education Department’s announcement of this latest extension, Secretary of Education Miguel Cardona said the time for such measures is ending.

“As our nation’s economy continues to recover from a deep hole, this final extension will give students and borrowers the time they need to plan for restart and ensure a smooth pathway back to repayment,” Cardona said in a news release.

Even the additional runway doesn’t mean borrowers — or the servicers that handle student loan payments — will be ready in February 2022, student loan experts say.

“The student loan system is not ready to resume repayment on Oct. 1, and President Biden has made the right decision to postpone repayment,” Persis Yu, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project, said in a news release.

Yu suggested the administration use the pause to consider further relief, such as broad student debt cancellation and adjustments, so that borrowers in default won’t face wage garnishment or seizure of tax credits and Social Security benefits when payments resume.

Scott Buchanan, executive director of the Student Loan Servicing Alliance, the trade association of student loan servicers, sees the extension as a missed opportunity.

“The department still must do the hard work to lay out a plan for resumption — which has yet not occurred,” he said in an email.

Buchanan advocated “a phased-in resumption where those who haven’t been financially impacted resume payment and those who have can continue to suspend payment or use an income-driven plan.”

How should borrowers prepare with six months to go?

If you are struggling financially

Borrowers who think they might have trouble making their payment next year can use this final payment extension as a trial period.

Start making practice payments now by setting aside your regular student loan bill amount. This will get you back in the habit of seeing the payment leave your account. But, more importantly, it will let you know if you are financially capable of making the payments.

If making the practice payments is difficult — or impossible — after two or three months, contact your servicer to discuss your options, like enrolling in an income-driven repayment, or IDR, plan.

Income-driven repayment plans cap payments at a portion of your income and extend the repayment term. If your income is low enough, or if you don’t have a job, your payment could be zero. If you’re already enrolled in IDR, make sure to recertify your income with your servicer if it has changed.

If you are financially stable

Not all borrowers experienced financial hardship during the economic downturn — and others have been able to bounce back. If you are confident in your ability to make payments next year, you can use this opportunity to make sure your financial goals are in place.

Borrowers interested in lowering their overall debt, decreasing the amount they’ll repay in interest on student loans or paying them off faster should consider making payments during the final stretch of the pause.

Your payments will be applied to any interest accrued first before your principal, but any payment will help you reduce the total amount you’ll pay over the life of the loan. Since your loans are on automatic forbearance, you’ll need to contact the servicer to do so.

Borrowers with high-interest debt, like credit cards, or long-term saving goals, like a house down payment, can apply would-be student loan payments to those goals, too.

For borrowers with special circumstances

If your situation isn’t so cut and dried — like loans in default or in the Public Service Loan Forgiveness program — the forbearance extension may have special implications for you. Contact your servicer or lender for insight on how to best handle your loans.

Cecilia Clark and Colin Beresford are writers at NerdWallet. he article originally appeared on NerdWallet.