Good news for companies and borrowers alike! In early April, the Biden Administration extended the pause on federal student loan payments, effectively giving borrowers time to prepare and companies time to adopt employer student loan contributions as a benefit and make a significant impact on their employees’ student debt before payments resume in the fall.
Curious what this extended pause means for you? Read on!
On March 13, 2020, the US Government began pausing student loan payments and reduced the interest rate to 0% of eligible federal loans. That pause was extended on December 22, 2021 with payments expected to resume on May 1, 2022. This meant that for the past 2 years, Americans with federal student loans have not been required to make minimum payments and their loan principals have not accrued any interest. Any payments made on federal loans during this time were applied directly towards the loan principal balance.
The original Federal student loan payment pause was extended on December 22, 2021 with payments expected to resume on May 1, 2022. However, on April 6th, the Biden Administration announced they would extend the pause until August 31, 2022. While it’s too early to tell if Biden will extend the pause again, it’s worth noting that this is the fifth extension since the pause started in March 2020. As the nation continues to recover from the pandemic, there’s a good chance student loan repayments could resume by the end of the year.
With the extended pause on payments, Americans with federal student loans will continue to get a reprieve from their monthly student loan burden and can spend the money that they would have used on their minimum payments, however they see fit. For some, this might mean paying off private student loans (which are not paused) or other forms of debt (e.g. credit cards, mortgages, car loans, etc) faster; For others, this grace period has been a time to build wealth and work towards other financial goals like saving for a down payment or retirement.
One thing borrowers should be wary of though is that forbearance is not the same thing as forgiveness. Once federal student loan payments resume, nearly 41M Americans will be back on the hook for their minimum monthly payments.
Once federal student loan payments resume, the financial stress associated with them is likely to return in full force
Once federal student loan payments resume, the financial stress associated with them is likely to return in full force–the student debt crisis has only grown during the pandemic and a majority of borrowers have not paid down their federal student loans during the payment pause. In fact, in a 2021 Survey, 89% of fully-employed workers with student debt reported that they weren’t prepared for student loan payments to resume. What’s more, according to a recent report by the New York Fed, 83% of borrowers with increasing loan balances did not make progress on paying down their loans during the payment pause and when payments are required again, 1 in 3 borrowers are at high risk of missing at least one payment according to a study by the California Policy Lab and Student Loan Law Initiative. That data is pretty clear: even with this brief respite in payments, for many working Americans, student loans are a financial stress that hasn’t gone away.
With payments paused until the early fall (maybe even through the end of the year), now is the perfect time for companies to consider adopting tax-free employer student loan contributions as a benefit.
By adopting this benefit this year, companies can help their employees pay down their outstanding federal loan balances faster, saving them thousands of dollars in accrued interest and untold amounts of financial stress once the federal moratorium ends.
Disclaimer: This article is purely information and is not intended as financial advice. If you have federal student loans and want to know how this will affect your particular situation, visit StudentAid.gov