The Student Loan Pause: Pros & Cons

Since early during the coronavirus pandemic, the student loan pause has provided Americans with needed financial relief. Not only has the program stopped monthly payments and waived interest charges, but it's been easy to access and also helps those who were in default. But with President Joe Biden recently continuing the program through at least August 2022, you might wonder if there are downsides that will affect you when payments restart.

Evaluating the student loan pause pros and cons will help you better understand how it affects your financial situation and what you can do to prepare for the future.

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The main benefit is student loan borrowers of qualified federal loans – such as various types of Direct loans – don't have to budget for their loan payments during the pause. This temporary relief can help you out whether you're out of work, dealing with rising prices or wanting to focus on repaying other debt.

While your student loan payment amount depends on the amount borrowed, your interest rate and your chosen payment plan, those with a standard repayment plan can particularly see relief right now. For example, if you have $75,000 in student loans and pay a 5.28 percent interest rate, you have around ​$800​ extra in your budget each month during the pause.

From July 2021 through July 2022, typical federal student loan interest rates go as low as ​3.73 percent​ for Direct loans for undergraduate students to as high as ​6.28 percent​ for Direct Plus loans. Especially for those with a high balance, the interest can significantly add up.

With the rate set to ​zero percent​ during the pause, you get the benefit of not having the interest continue to accrue and increase your student loan debt. That's usually not the case with a normal forbearance or deferment. As a bonus, you likely also won't have to worry about interest capitalization.

​Consider also​: How to Calculate Daily Interest Rates

Although interest won't be added to your balance, you won't see your federal student loan balance decrease either with the payments paused.

If you ended up defaulting on your student loans before the pause, you'll benefit from not having collections actions such as garnishments and collection calls taken against you during the pause. Your qualified federal student loans will now be in good standing so that you can have a fresh start when payments resume.

You'll see this updated status reflected on your credit report. To prevent future delinquency, you can look into income-based repayment options.

When you have financial hardships and need a student loan payment pause, you usually would contact your lender and submit paperwork to get approval. However, the current pause by the federal government is usually automatic without any action needed on your part. Instead, you'd need to contact your lender if you want to voluntarily continue automatic monthly withdrawals, or you could submit manual payments online.

​Consider also​: Federal Student Loans

If you're in the Public Service Loan Forgiveness (PSLF) or an income-driven repayment (IDR) plan, the federal government requires a certain number of payments or years before you can obtain loan forgiveness. The good news is that the government is counting these paused payments so that you won't need to worry about making up for them later to get your balance at that time forgiven.

In addition, there's a PSFL waiver that could help you apply other past payments toward the path to forgiveness. For example, these might include payments made on a different payment plan or those that you sent in late. In any case, you'll still need to meet the employment qualifications.

The most notable downside is that you won't get relief for any student loans that the U.S. Department of Education doesn't hold. Not only does this include all private student loans, but it also applies to some government student loan programs.

For example, if you have a Federal Family Education Loan (FFEL) or Perkins loan, it won't be eligible unless the loan was sold to the federal government. In addition, a Health Education Assistance Loan (HEAL) only is eligible if you were in default before the pause.

​Consider also​: Definition of Outstanding Loans

Although interest won't be added to your balance, you won't see your federal student loan balance decrease either with the payments paused. This means you'll still have to pay the balance back eventually. The exception is if you voluntarily make payments during the student loan repayment pause, which can be a good idea while there's no interest.

There's been a lot of pressure on the Biden administration to take executive action or for Congress to cancel student loans. But since any potential student loan forgiveness is unclear, you should prepare to restart your student loan payments soon after the pause ends near the fall. This means you might find it financially difficult to get used to fitting your loan payments back into your budget.

In the meantime, you can also watch for any further pause extensions or talk about debt cancellation. There may especially be pressure for action from the Democrats in late summer as the midterm elections approach.

If you're concerned about the end of the student loan pause, now is a good time to start exploring your options and planning for repayment. Some steps you can take include the following:

• ​Check your loan details​: Even when you don't have your student loan payments paused, you should periodically check with your loan servicer. That way, you can see how much you still owe, what interest rate you're paying and what monthly payment you can expect.
• ​Research​ ​student loan payment​ ​plans​: If you're not already on an income-driven repayment (IDR) plan, getting on one can give you a more affordable monthly student loan payment plus provide a path toward loan forgiveness. You can choose from various plans that cap your payment to a percentage of your discretionary income and forgive the remainder of your student loan debt after ​20 or 25 years​. You can ask your loan servicer about the options.
• ​Consider​ ​consolidation​: If you have numerous federal student loans, consolidating them could provide convenience with just one payment to manage. You can consolidate through the federal option or a private lender. Note, however, that you usually don't get a better rate with the federal option. Also, consolidating privately means losing any potential loan forgiveness benefit.
• ​Learn about​ ​deferment​ ​and​ ​forbearance​: Depending on your financial situation and any other extenuating circumstances, your loan servicer might allow you to defer your loans or continue your forbearance past the pause period. This can mean pausing payments entirely or paying less for some time.
• ​Explore voluntary payments​: If you're looking to reduce the total interest paid on student loans, look at your budget and see if you can contribute any money toward your student loans. You might opt to pay a lump sum or make small monthly payments to lower the balance.
• ​Don't fall for​ ​scams​: Unfortunately, plenty of scams target federal student loan borrowers who struggle with repayment. The Department of Education highlights common scams that promise loan forgiveness and may charge a fee for this benefit. Avoid providing any personal information or interacting with companies advertising these kinds of claims.

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