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How to take advantage of the student loan moratorium extension


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Marielle Tomlin has taken advantage of the student loan payment freeze to pay off more than $50,000 in student loan debt. And she’s excited to have an extended opportunity to continue reducing her student debt.

The Biden-Harris Administration has extended the pause on payments, interest, and collections through August 31, 2022. The latest freeze gives Tomlin, and millions of others with student loans, new respite from the burden of payments. monthly.

Now is a good time to take advantage of the added financial flexibility, but don’t count on it being permanent because experts don’t think blanket student loan forgiveness is likely.

Not having to pay interest has energized Tomlin and allowed him to accelerate the payment of his student debt of more than $170,000. This has motivated her to keep paying more, she says. Tomlin started out paying $500 a month and worked her way up from there, putting large portions of the money she earned from her midwifery practice into her student loans. I feel like I’m running the clock down [no interest period] and the break is ready,” she says.

If you’re taking advantage of this student loan freeze, here’s what you need to know about the pause and how to take advantage of it.

There’s a ‘fresh start’ for those struggling to make payments

During the student loan payment freeze, borrowers who were behind on payments have had all collections paused. With this latest extension, there are plans to help borrowers who are behind on payments by eliminating delinquency and default status on loans. This is a big deal that will allow about 8 million borrowers to essentially get a fresh start, says Adam S. Minsky, an attorney specializing in student loan law.

At this point, the government has yet to provide details on what it will look like and how it will work. Once this plan is put in place, it could be a boon to borrowers’ credit scores, greatly improving the chances of qualifying for a mortgage or securing a lower interest rate for all types of loans.

What we don’t know, however, is whether or not changes in delinquency or default status will be automatically reported to the credit bureaus. If the government doesn’t issue an automatic credit report correction, borrowers can advocate for themselves by writing dispute letters to their servicer and credit bureaus, says Catalina Kaiyoorawongs, co-founder of student debt financial wellness platform LoanSense. “In some cases, your credit score can increase by more than 100 points,” she says.

How Experts Recommend Approaching This Payment Freeze Extension

Having flexibility with your student loans and not having to worry about accruing interest gives you some options. “The first thing I would make that person ask themselves is, how can I make the most of this?” says Anna N’Jie-Konte, financial advisor and founder of Dare to Dream Financial Planning.

Here’s what the experts are saying about what you need to know about the student loan payment freeze and strategies to take advantage of it.

Do not count on general loan forgiveness

You may have extra room in your budget right now, but experts say you shouldn’t make long-term financial decisions based on it. You don’t want to commit to a higher mortgage payment when you’re saving $100 or $1,000 a month by not paying off student loans because “that suddenly becomes an issue once those [student loan] payments restart,” says N’Jie-Konte.

The experts we spoke with believe full forgiveness of all federal student loan debt is unlikely to happen. There may be some form of limited relief or an expansion of existing programs, but even that is up in the air. “I don `t believe [Biden’s] it’s going to wipe out everyone’s student loan debt, but there could be some kind of broader student loan forgiveness initiative of some sort,” says Minsky. “The administration has confirmed that that is still under consideration.”

The Public Service Loan Forgiveness (PSLF) program has already been revised to allow more borrowers to qualify. For those with an eligible public service job (teacher, firefighter, nurse, etc.), a broader range of federal loans and repayment plans will count toward PSLF requirements. If you qualify, you will need to apply for this limited exemption by October 31, 2022.

Boost your other financial goals

This could be a good time to save for a down payment on a house, boost your child’s college fund, or pay off high-interest credit card debt. “I had a client, I think he paid off $50,000 in credit card debt in the last two years,” says N’Jie-Konte. She has also seen people use the extra money as start-up capital for a business. “I think a lot of people are using it to fund their dream projects.”

Tomlin is taking advantage of this interest-free period to quickly pay off his school loans. Once he has paid off his student debt, he will be able to work less or expand his midwifery business by hiring another midwife. “I’ll be a lot more flexible once my loans run out,” she says.

Understand how it affects getting a home loan

Any debt will limit your ability to qualify for a mortgage and reduce the amount you can borrow by increasing your debt-to-income (DTI) ratio. But student loans have a unique and complicated relationship with your mortgage application.

If your student loans are in active repayment, then your monthly payment amount counts toward your DTI. This is true even if you have lower payments because you are taking advantage of an income-driven repayment (IDR) plan.

However, the calculation changes if your payment is zero, which is currently the case for many borrowers. Many borrowers automatically assume that because they’re not paying it, the lender won’t count it, and that’s far from the truth, says Kaiyoorawongs. In that scenario, a percentage of his student loan balance is included in his DTI. This percentage varies by loan type, but is typically 0.5% to 1% of your total loan balance. This means that for certain borrowers, not having their student loans in payment status can actually hinder their ability to purchase a home.

For an FHA loan, the maximum DTI is generally 43%, a family earning $6,000 a month could have up to $2,580 in monthly debt payments (including future mortgage payment). If this family has $100,000 in student loans and the loans are currently outstanding, then 0.5% of the loan balance counts toward your DTI, which would be $500.

In this scenario, the family could increase their purchasing power by putting their student loans in active payment. If they qualified for an IDR plan with a payment of $250 per month, this would be a 30-year loan with a 5% mortgage rate:

Student Loan DTI Impact maximum mortgage payment Maximum mortgage amount at 5% for 30 years*
With $0 Payment $500 $2,080 $345,200
with IDR $250 $2,330 $386,700

*According to NextAdvisor’s mortgage calculator

It may sound counterintuitive, but by restarting student loan payments, some borrowers can increase their home budget. And once you’ve closed on the house, you can still take advantage of the federal student loan payment freeze. “You only have to pay [student loans] for a month. You can pause again,” says Kaiyoorawongs.

Whether or not this strategy makes sense to you depends on your personal situation. You can apply for IDR at Studentaid.gov.

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