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By: Dr. Ron A. Rhoades

 

Last Wednesday, the Biden administration announced an additional extension of the student loan moratorium until August 31, 2022.[1] Approximately $1.58 trillion[2]  of outstanding federal student loans, interest accruals and collections have been frozen since March 2020.

The implications of the debt moratorium over the past two years were recently summarized in a report issued by the Federal Reserve Bank of New York, “As a result, nearly 37 million borrowers have not been required to make payments on their student loans since March 2020, resulting in an estimated $195 billion worth of waived payments through April 2022.”[3]

The Federal Reserve Bank noted, however, that “10 million borrowers with private loans or Family Federal Education Loan (FFEL) loans owned by commercial banks were not granted the same relief and continued to make payments during the pandemic.”[4]

The extension of the moratorium on payments, as well as the suspension of interest accruals on federal student loans, also includes provisions which affects those who were previously in default. All collections of the 7.1 million defaulted student loans[5] were stopped in 2020. The Biden Administration will now “reset” all previously defaulted loans to give them a “fresh start.”[6] The U.S. Department of Education will provide relief to those in default on their student loans “by eliminating the impact of delinquency and default and allowing them to reenter repayment in good standing.”[7]

Was relief needed? The Federal Reserve Banks’s report suggested that federal student loan borrowers, if student loan forbearance was not extended again, would “experience a meaningful rise in delinquencies, both for federal student loans and for other debt.”[8] Critics point out that the Biden Administration’s third extension of the student loan pause, which was enacted and extended twice during the Trump Administration, is unnecessary as the levels of unemployment in the U.S. have fallen to very low levels and that “hardworking Americans” are paying their debts.[9]

Some progressives in the U.S. Congress continue to call for full cancellation of federal student loan debts outstanding.[10] But commentators point out that simply canceling federal student loan debt does not address future college undergraduates and graduates and the loans that they would take out, nor does it address the rising costs of college seen in recent decades.[11]

Other actions taken by the U.S. Department of Education, affecting some borrowers, including revamping the Public Service Loan Forgiveness program, “which has already allowed the Department to identify more than 100,000 borrowers eligible for $6.4 billion in loan relief. As part of that effort, the Department implemented a Limited PSLF Waiver to count all prior payments made by student borrowers toward PSLF, regardless of the loan program. Borrowers who are working in public service but have not yet applied for PSLF should do so before October 31, 2022 and can find out more at www.StudentAid.gov/PSLF.”[12]

Also, the U.S. Department of Education has provided “$7.8 billion in relief for more than 400,000 borrowers who have a total and permanent disability.”[13]

Those who possess student loan debts should take advantage of this time to develop a strategy for repayment of their debts while balancing other financial goals. Rushing into student loan consolidation, often pushed by private lenders, is often not a good option. Rather, borrowers should consider many possibilities for the proper use of earned income to meet necessary expenses, such as paying down debt, fund retirement savings account (including securing a matching contribution from employers where available), fund Health Savings Accounts (where available), build up cash reserve funds, and planning for discretionary expenditures.

Fortunately, the development of a financial plan for student loan repayments and other purposes is available to many, as many financial planning and investment advisory firms have developed programs to serve not only those with accumulated wealth, but also those in the early stages of seeking to achieve financial security.

 

Dr. Ron A. Rhoades serves as Director of the Personal Financial Planning Program at Western Kentucky University, where he is a professor of finance within its Gordon Ford College of Business. Called “Dr. Bear” by his students, Dr. Rhoades is also a financial advisor at ARGI Investment Services, LLC, a registered investment advisory firm headquartered in Louisville, KY, and serving clients throughout most of the United States. The author of the forthcoming book, How to Select a Great Financial Advisor, and numerous other books and articles, he can be reached via: [email protected]

Respective services provided by ARGI Investment Services, LLC, a Registered Investment Adviser, ARGI CPAs and Advisors, PLLC, ARGI Business Services, LLC, and Advisor Insurance Solutions, LLC. All are affiliates of ARGI Financial Group LLC. Trust services provided by ARGI Trust, a division of Advocacy Trust LLC.

 

 

[1] Quarterly Report on Household Debt and Credit,4TH Quarter 2021, Center for Microeconomic Data, Federal Reserve Bank of New York.

[2] Statement by President Biden Extending the Pause on Student Loan Repayment Through August 31st, 2022 (April 6, 2022).

[3] Jacob Goss, Daniel Mangrum, and Joelle Scally, “Student Loan Repayment during the Pandemic Forebearance,” Liberty Street Economics, Federal Reserve Bank of New York (March 22, 2022).

[4] Id.

[5] Erika Giovanetti, “Student loan borrowers in default will receive ‘fresh start’ when forbearance ends: Education Department,” FoxBusiness (April 7, 2022).

[6] Press Release, “Biden-Harris Administration Extends Student Loan Pause Through August 31,” U.S. Department of Education (April 6, 2022).

[7] Erika Giovanetti, “Student loan borrowers in default will receive ‘fresh start’ when forbearance ends: Education Department,” FoxBusiness (April 7, 2022).

[8] Id.

[9] See, e.g., Zach Friedman, “Republicans Call Student Loan Relief ‘Outrageous’ And An ‘Insult’,” Forbes (April 7, 2022).

[10] See, e.g., Weston Blasi, “’Cancel student debt. All of it.’ — Politicians react to Biden extending student loan payment pause through August,” MarketWatch (April 6, 2022, updated April 7, 2022), noting that U.S. Senator Bernie Sanders and U.S. Representative Alexandria Ocasio-Cortez continue to advocate for federal student loan cancellations.

[11] Zach Friedman, “Former Education Secretary Says All Student Loans Should Be Cancelled, But These Are The 3 Major Issues,” Forbes (March 24, 2022).

[12] Press Release, “Biden-Harris Administration Extends Student Loan Pause Through August 31,” U.S. Department of Education (April 6, 2022).

[13] Id.

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