Student Loans

What Happens If I Stop Paying My Student Loans

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 8 minute read

The temporary reprieve from paying loan payments is great news for me and the many others who are in the same position. Even though I’m on a plan that adjusts payments according to my income, I still end up paying close to $700 per month. Especially if you’re a parent feeding a hungry child, it’s a lot.

A temporary halt to payments may sound like a good idea, but it doesn’t mean you should do it. The question is whether or whether you should put your loan payments on hold to take advantage of administrative forbearance. It all depends on the particulars of one’s own goals and intentions.

Should I Stop Making Payments on My Federal Student Loans While Interest Rates Are Zero?

Most federal student loan payments and interest will be deferred until August 31, 2022. This administrative forbearance will postpone payment due dates for qualified loans until September.

The interest on your loan will not accrue while you postpone payments. Certainly, that’s an alluring justification for skipping payments. However, there are various factors to think about before you choose the automatic payment suspension.

Motives for Making Optional Student Loan Payments

Paying debts is never fun, especially when you’re allowed to keep the money for yourself, but there are times when it may be better for your long-term financial health to maintain making payments on your student loans.

  1. You’ll be able to pay off your loans more quickly.

While your payments are suspended, no interest will be added to your student loans because the interest rate is now set at 0%. Any payments made after the interest accumulated prior to the suspension’s start date of March 13, 2020 will be applied only to the principal balance of your student loans.

Having more disposable income might help you pay off your student debts quicker. So, for illustration, imagine you took out a $40,000 student loan at 5% interest.

For example, if you were to keep making your $424 monthly payment (what it would be on a conventional 10-year repayment schedule) during the two-year payment break, you would pay off your debts six months early.

Alternatively, if you default on your loan payments, you can expect to pay for an additional two years.

  1. Over time, you will pay less interest.

No additional interest will be added to your loans as long as you keep making payments throughout the suspension period. You’ll save money on interest and principal by shortening the length of your loan’s payback period.

Borrowing $40,000 at the average interest rate of 5% over a typical payback period of 10 years will cost you roughly $11,000 in interest. No adjustments will be made if payments are stopped during the payment suspension period. The only effect will be to postpone payment.

However, if you keep up the same payments (assuming you’ve been paying them since March 13, 2020), you’ll be able to knock nearly $2,700 off that number.

  1. You are not required to make the entire monthly payment.

Even though you aren’t compelled to pay anything during the payment pause, you can still make some progress on your debts by paying a lesser amount than you normally would.

In addition, there is no deadline, so payments can be made whenever they are convenient for you. Any money you send will go straight to the principle (unless you have accrued interest in arrears), bringing down your debt more quickly than if some of each payment had to go toward interest.

Reasons to Put Your Student Loan Payments on Hold

There are benefits to keeping up with student loan payments during the payment pause, but there are also many reasons to put off doing so.

  1. You don’t have the funds right now.

As part of a government plan to help Americans cope with the financial fallout of the coronavirus outbreak, the first payment was temporarily suspended.

In the years afterwards, a lot of people in the United States have had significant changes imposed upon them. They may have lost their employment, been forced to accept lower-paying work, incurred substantial medical debt as a result of a serious infection, or been reduced to a single-income household in order to cover the costs of child care and distant education.

Meanwhile, supply chain interruptions have pushed inflation to levels not seen since the 1980s. Many people’s already limited budgets would be unable to withstand this.

If that’s the case, you shouldn’t bother making payments on your student debt. While your loans are on forbearance, they will not accumulate interest, relieving you of the stress of watching the principal sum rise. This means that you will have more money for other, more important things like rent and food.

  1. You Want to Concentrate on Other Financial Objectives

Even if you can afford to pay off your student loans while the interest rate is 0%, you may want to wait. When the interest on your debt is less than 5%, investing is preferable to paying it off.

The average return on the stock market over time has been around 10%, thus this is why. Consequently, you might get a lot more out of your money if you saved it instead of putting it toward your student debts, and put it into a retirement account like a Roth IRA, or an exchange-traded or mutual fund.

If you borrowed $40,000 at a typical interest rate of 5% and continued making payments throughout the administrative forbearance, you would save more than $2,700.

As an alternative, you may invest your $424 monthly payment over the course of 2.5 years and receive some income, but it would likely be very little (about $1,000, depending on market performance).

However, investing’s magic really only shows itself over the course of several years. If the market returns the historical average, you may have nearly $148,000 if you keep your money in the market for another 25 years without adding to it.

Let’s say you’re able to save $2,700 in interest by paying off your debts early, but your total benefit was $148,000 (more than $135k). And that’s just assuming you started paying back your college debts without putting any money into a retirement account. If you kept adding to it, it would get much higher.

  1. You’ve Enrolled in a Repayment Plan Based on Your Income

Payment on student loans is not recommended if you registered in an income-driven repayment plan prior to the administrative forbearance. The time that you don’t have to make payments counts toward loan cancellation.

Therefore, taking part in the payment suspension is the same as having many years subtracted from your forgiveness total automatically.

Other effects of administrative forbearance on income-based repayment programs exist. Applicants and current enrollees in an income-driven repayment plan have until February 28, 2023 to self-certify their income.

That implies you may forget about submitting proof of income or a tax return. To qualify for income-driven repayment plans, you must indicate that “I’ll self-report my income” in Step 2 of the application process. Self-certification through the phone is an option as well.

In addition, the deadline for recertifying your income under an income-driven plan that you registered in prior to the payment suspension has been extended until August 31, 2022. 

Recertification deadlines for income-based plans have been pushed out by the government until at least March 2023. When it is time for you to recertify, your servicer will let you know.
Alterations to your income, particularly a decrease, allow for earlier recertification. As the monthly payments in an income-driven repayment plan are scaled to your actual income, they will naturally decrease after the administrative forbearance expires.

Now is also a good time to enroll in an income-driven repayment plan if you expect to have trouble making your student loan payments again once the grace period ends.
StudentAid.gov is a good place to start, or you may call your loan provider.

  1. You’re Trying to Get Your Public Service Loans Forgiven

Paying off your student debts in full is a prerequisite to qualifying for loan forgiveness under the Public Service Loan Forgiveness Program, which requires 120 qualifying payments to be made on time.

However, your debts must be enrolled in an income-driven repayment scheme in order for you to be eligible for public service loan forgiveness. Therefore, throughout the period of administrative forbearance, the following rules remain in effect: If you put off making payments on your loans but are still able to keep them, the time during which they are in forbearance will contribute toward the loan’s eventual cancellation (as long as you continue to work for a qualifying employer).

For this reason, making payments on your student loans during the forbearance period won’t speed up the repayment process. Paying them off would be like throwing money away.

It’s important to keep in mind that changes are being made to the program in addition to the temporary suspension of payments. All “payments” (including deferrals, forbearances, and partial payments) made before are temporarily waived and contribute toward the forgiveness total. Also, it provides for discharge of any federal student debt under any repayment plan.

You need only have worked full-time for a government agency or a nonprofit organization during the time period in question to be eligible for retroactive reimbursement. The provisional exemption will end on October 1, 2022. Go to StudentAid.gov if you want to learn more.

  1. You only owe a little amount of money on your student loans.

While some politicians have urged Congress and President Joe Biden to erase all or part of the nation’s $1 trillion in outstanding student loan debt (estimates range from $10,000 per borrower to the full amount), this is unlikely at this time.

Even though Biden has repeatedly asked Congress to enact a measure for him to sign that would forgive up to $10,000 in student loan debt for each borrower, Congress has failed to do so. In spite of several opportunities, Congress has neglected to incorporate student loan forgiveness in legislative relief packages.

So, if you’re waiting to see if student debt forgiveness will occur before making payments, you definitely shouldn’t. When the suspension is over, you may expect your debts to still be there.

There is still a very slim possibility that some level of forgiveness might occur. They say that something isn’t over until it actually is.

As a result, you may put the money you would have used to pay off your debts into a savings account instead, protecting yourself from the risk of losing it. Then, if the promised loan forgiveness of $10,000 actually occurs, you’ll have a great cushion in case of unexpected expenses.

Also, if it doesn’t work out, you won’t be out anything. As a result, your loan balance will not have increased. When the time comes to start paying back your loans, you can use the money you’ve set aside to make a large payment toward the loan with the highest interest rate.

Prioritizing principal reduction might help you get the most out of your payment. That will provide you with a nudge in the right direction so you can pay off your debt more quickly.

Bottom Line

It’s reasonable to desire to get rid of debt quickly if you’re in a stable financial situation. Clearing up your debts might be like putting down a heavy load.

When the interest rate on student loans is zero, it may be tempting to spend that extra cash to pay off the debt faster. You may put it to better use by investing it or even just keeping it in the bank as a safety net until the payment hold is lifted.

In addition, there is no purpose in making payments if you are enrolled in an income-driven repayment plan or work in a public service capacity, as the $0 installments will contribute toward forgiveness.

The good news is that the administrative forbearance on your federal student loans will be granted without any action on your part.

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