By Alexis Leondis / Bloomberg Opinion
Federal student loan borrowers have been granted another reprieve, but for those who can afford it, the most prudent thing to do is to just fork over the money.
Almost everyone has been taking advantage of the moratorium, which allows borrowers to press the pause button on payments without any interest accruing. Just 500,000 borrowers out of 43 million, or 1.1 percent, were still making payments a year after the freeze was initiated in March 2020 as part of pandemic relief efforts.
There’s reason to believe lots more are capable of doing so, but choosing not to. Studies show that households with graduate degrees (in other words, those that tend to be higher earners) owed 56 percent of the outstanding education debt, and 3 percent of those with professional and doctorate degrees held 20 percent of the debt. What’s more, the unemployment rate for workers with at least a bachelor’s degree is less than 2 percent.
Payments on $1.6 trillion of federal student debt were scheduled to resume May 1, but last week, the Biden administration said it was extending the relief until Aug. 31. (For those who are keeping track, this was the sixth extension.)
Taking advantage of another four months free of student loan payments seems like a no brainer; why make a payment if you don’t have to? But there are a few reasons why skipping payments could prove to be short-sighted for some.
First, going ahead and making payments during the hiatus, while there’s still no interest being charged on the loan, means your money will go directly toward the principal amount, helping you to pay off the loan faster with less interest overall (much like prepaying a mortgage). (Keep in mind that proceeding with student loan payments is best suited for those who have already checked off the personal-finance basics of creating an emergency fund and paying off any higher-interest debt first.)
Another reason is simple budgeting. Behavioral research shows that people tend to spend the money they have available. One recent study shows that student loan borrowers were more likely to have taken out a first mortgage while payments have been frozen compared with those who have no student loans. That raises the question of how tight their budget will be when they eventually have to resume payments.
If you’re still not convinced, at the very least consider setting aside the money for your student loan payment in an interest-bearing account for when repayments resume, as finance professor Adam Looney suggests.
Some may think it’s pointless to make student loan payments given the chatter about student debt being forgiven. During the presidential campaign, Biden talked about erasing $10,000 for all borrowers, while Democratic Sens. Chuck Schumer and Elizabeth Warren have more recently pushed for canceling $50,000 of student debt.
It’s reasonable to think the payment freeze will be extended beyond Aug. 31 since asking borrowers to restart payments ahead of the mid-term elections would be foolish. But don’t bank on widespread loan forgiveness because it might just be too complicated for the Democrats to pull off.
It’s not clear whether Biden has the authority to cancel student debt through executive action. But even if such a move survived a legal challenge and he followed through on his campaign plan, $10,000 of debt erasure is relatively small considering the average amount of student debt is around $30,000. So the payments you make over these next several months are unlikely to be for naught. Legislative action seems near-impossible, too, since Democrats lack consensus about how much debt to forgive and how to offset the cost.
Certain public service employees, such as teachers and nurses, are in a category of their own, and should be aware that there have been recent updates to a federal program that would help to forgive debt after they’ve made payments for 10 years. If you qualify, you’ll receive credit for making payments during the moratorium without actually having to make them.
Another way the Biden administration could provide more relief for student debt would be by expanding one of the existing repayment plans currently offered to certain borrowers, according to Mark Kantrowitz, a student financial aid expert. But such programs, which forgive the balance remaining at the end of a designated repayment period, would be targeted to those who need it most; which means that if you can afford to make payments now, you probably wouldn’t qualify.
So it doesn’t seem like higher-earning loan holders will be getting a free lunch anytime soon. And that means they should use the latest moratorium extension to get ahead while they can.
Alexis Leondis is a Bloomberg Opinion columnist covering personal finance. Previously, she oversaw tax coverage for Bloomberg News.