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Some student loan borrowers are 19 months closer to forgiveness

NerdWallet Millennial Money College Isn’t Priceless
Posted at 8:08 PM, Mar 08, 2021
and last updated 2021-03-08 20:08:55-05

Federal student loan payments have been on hold, interest-free, since March 13, 2020, as part of coronavirus relief. The forbearance has been extended through Sept. 30, 2021. If the pause isn’t extended again, borrowers will have had a 19-month respite from their loans.

Most borrowers will resume payments owing exactly what they did when the forbearance began. But some will be 19 months closer to having no more payments at all.

Every month of the forbearance counts toward the 120 needed for Public Service Loan Forgiveness, or PSLF, and the amount required for income-driven repayment forgiveness — 240 for undergraduate debt or 300 for graduate debt.

This means borrowers seeking forgiveness will still be forgiven on the original timeline, but they will have paid less over time.

How much less depends on a lot of things.

Who can benefit?

Nineteen months of not making payments saves you money only if:

  • You’re pursuing Public Service Loan Forgiveness.
  • You’re pursuing income-driven repayment forgiveness and your payments are low enough that you won’t have repaid your loan by the time you get forgiveness.
  • You’re on a standard or graduated 10-year repayment plan and you take advantage of the interest-free period to make extra payments toward your principal, which will save you money on interest.

If you can get forgiveness, the monetary value of the pause to an individual borrower will depend on where you are in your payment cycle and your payment amount, which is determined by your income. Here are some scenarios that demonstrate what it could do for borrowers pursuing PSLF or income-driven payment forgiveness.

How much borrowers in public service jobs could save

Say you’re a 2019 graduate who never made a payment on your $27,000 in undergraduate federal loans before the 2020 payment pause.

But before the pause, you got a job working full-time for a qualifying public service employer. You’re planning to pursue PSLF and are enrolled, as required, in an income-driven repayment plan. We assume your salary will rise over time at a rate of 3.2% over 10 years of repayment. You were set to make your first payment when the pause began in March 2020.

By the time your loans are forgiven after 10 years, here’s how much not making 19 months of payments could save you (according to potential income):

  • $20,000 income: $1,098 saved.
  • $30,000 income: $3,176 saved.
  • $40,000 income: $5,254 saved.

Now say the same employment scenario is true, but in this case you have high federal student loan debt — $129,500 — which you accumulated for both undergraduate and graduate education. But that higher degree helped you snag a job with a higher income. Again, we assume you will stay in public service and your income will increase at a 3.2% rate over 10 years of making payments.

By the time your loans are forgiven after 10 years, here’s how much not making 19 months of payments could save you (according to potential income):

  • $70,000 income: $11,489 saved.
  • $80,000 income: $13,567 saved.
  • $90,000 income: $15,645 saved.

Savings on an income-driven plan isn’t guaranteed

Forgiveness takes much longer if you’re not employed in a qualifying public service position. An income-driven repayment plan could still save you money — if you don’t pay off your debt before forgiveness.

Once again, say you’re a 2019 graduate who never made a payment on your typical $27,000 in undergraduate federal loans before the 2020 payment pause. You are working and enrolled in the most widely available income-driven repayment plan, Revised Pay As You Earn. Under REPAYE, your payments are forgiven after 20 years if you used loans toward undergraduate studies.

In this example, you were set to make your first payment when the pause began in March 2020. We assume, like the other examples, that your salary will rise at a rate of 3.2% over 20 years of repayment.

By the time your loans are forgiven after 20 years, here’s how much not making 19 months of payments could save you (according to potential income). It’s important to note if your income rises, you might pay off the loan before it is eligible for forgiveness:

  • $20,000 income: $2,636 saved.
  • $30,000 income: $5,484 saved.
  • $40,000 income: Nothing saved. You repaid your debt after 151 months (12.5 years).

Again, say the same employment scenario is true, but in this case you have both undergraduate and graduate debt that puts your total owed at $129,500. You now have a higher income, which we assume will also rise at a rate of 3.2% and you’ll repay for 25 years (300-month repayment term for graduate studies).

By the time your loans are forgiven after 25 years, here’s how much not making 19 months of payments could save you (according to potential income):

  • $70,000 income: $20,275 in savings.
  • $80,000 income: $23,609 in savings.
  • $90,000 income: No savings. You repaid your debt after 269 months (22.4 years).

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Anna Helhoski writes for NerdWallet. Email: anna@nerdwallet.com. Twitter: @AnnaHelhoski.