When Will I Have to Repay My Law School Loans?
Executive Summary:
The Department of Education has extended the student loan payment pause until at least August 31, 2022. It’s likely that this pause will be extended again because it would be politically difficult to resume payments right before the November midterm elections. There is also a possibility that a certain amount of student loans will be forgiven. For lawyers this is an ideal opportunity to take would-be student loan payments and apply them to more meaningful goals. Lawyers should take this time to make good financial decisions and also avoid some other financial pitfalls.
On April 6th, the Department of Education further extended the student loan freeze through August 31, 2022. For most young lawyers, this extension was another financial relief. It gave lawyers another opportunity to put their would-be monthly student loan payments of potentially $1,750+ towards other goals.
After over two years of no student loan payments, most borrowers’ living costs have increased since pre-COVID. There also will be three years of graduates who have never had to make a student loan payment. Likely, many of these graduates have not been withholding the cost of their student loans from their monthly expenses. Newly graduated lawyers may have to modify their monthly spending when loans do a resume.
So you are probably wondering, when will I have to repay my student loans?
My Answer: Plan to begin repaying your student loans after August 31st, but expect another extension of student loan payments before this new deadline.
What is the Student Loan Freeze?
The student loan freeze was implemented at the beginning of the COVID outbreak in March 2020 by the Department of Education. During this freeze, the DoE set the interest rate of every federal student loan to 0%. Borrowers with federal student loans would not have their student loan balances increase due to interest accumulation during the pause. The DoE also suspended all student loan payments until the freeze ended.
These interest rate changes and pauses of payments only affected federal student loans. If borrowers had privately refinanced their student loans before the March 2020 freeze, they still had to make payments throughout the pandemic, and their loans continued to accrue interest.
For student loan borrowers pursuing Public Service Loan Forgiveness (PSLF) or Income-Driven Repayment (IDR) plans, each month during the freeze counted towards their student loan forgiveness.
Altogether, these benefits were a significant win for federal student loan borrowers.
Why might student loans be extended again?
In the 2020 presidential election, Joe Biden’s campaign indicated that they would look into forgiving student loans. It was unclear how much they would be able to cancel or if they could constitutionally cancel student debt. As of early April 2022, the Biden Administration has not forgiven a specific dollar amount of student loan debt for all borrowers.
Borrowers pursuing PSLF and IDR plans may have benefited from forgiveness during the COVID pause, but most borrowers have not experienced any forgiveness yet.
So does the student loan pause count as forgiveness?
In a way, it does. It has given every borrower with federal student loans a financial reprieve from repaying their student loans. In total, borrowers have saved nearly $200 Billion in student loan payments since the freeze began.
The student loan pause has proven an effective way to save borrowers from the burden of student loans without raising constitutional questions about forgiving a hard dollar amount of student loans.
So will the administration continue extending this student loan pause?
Before this announcement, a group of Democratic congresswomen and congressmen urged the Biden administration to extend the student loan pause for the rest of the year. Until the announcement of a pause extension until August 31st, it looked like the Biden Administration would extend the freeze until the end of the year.
So what changed?
The 2022 midterm elections.
In November, voters will head to the ballot box to vote on 34 Senate seats and all 435 House of Representatives seats. Analysts expect it to be a competitive election that will decide the balance of power in Washington D.C.
Midterm elections are not about the President, but midterms are affected by the perceived performance of the current administration. To give their party the best chance of winning in the midterms, the Biden Administration will try to drum up support for their agenda. One way to do this is to highlight how they have fulfilled campaign promises.
If you are trying to energize and excite young voters to vote, can you imagine a worse political move than resuming student loan payments within two months of the election? It would not guarantee a loss for the Democratic party, but it wouldn’t help motivate young voters, who have expressed that student loans are a serious concern, to get to the polls and vote.
My opinion is that August 31st was chosen as a date for the student loan extension because it provides an opportunity to show voters right before the election that the Administration and Democrats are fulfilling their promise to help student loan borrowers. If resuming student loan payments is extended again, it is not apparent when the next deadline will be. My best guess would be the end of this year.
If I had to rank the possible outcomes for likelihood, I believe it would look like this:
The student loan pause extends until the end of 2022
Student loans payments resume after the August 31, 2022 deadline
Forgiveness of $10,000 of student debt before the 2022 midterm elections
Forgiveness of $50,000 of student debt before the 2022 midterm elections
The Student loan pause lasts indefinitely
The confidence I have between the top 2 outcomes and the other 3 is significant, but I believe they have a non-zero chance of happening.
Focus on what you can control
The prospect of having student loans forgiven or the payment pause extended again is exciting. It allows young lawyers to put money that would have gone towards student loans towards more valuable things.
Lawyers should understand we have no control over the student loan decision in Washington D.C. (minus the lawyers working on this). Hoping for an outcome is not as helpful as acting on the present opportunity.
There are quite a few things lawyers can do between now and at least August 31st to improve their financial situation. These include:
Fund your emergency fund
Pay off other debts (credit cards, car loans, mortgages)
Contribute more to retirement and investment accounts
Save for other financial goals
Avoid increasing your monthly spending any further
If you want to learn more about these opportunities, check out my blog post for the previous May 1st deadline. I breakdown how to do all of these things in more detail.
A few things lawyers should probably not do before August 31st include:
Privately refinancing their student loans. Many refinance rates today are similar to current federal interest rates on student loans. Why give up the chance of forgiveness or future pauses for only small savings on interest?
Significantly increasing your monthly expenses between now and August 31st. It’s more likely that student loan payments will resume than borrowers receiving an indefinite extension. The closer your monthly costs are to your monthly income, the harder it will be when the payment pause ends to make the necessary payments without sacrificing your current standard of living.
Avoid making a plan to pay off your student debt when it does resume.
Are you interested in learning more about how to take advantage of this student loan payment pause? This is a time to put would-be payments towards more meaningful goals. If so, schedule a free Meet and Confer with me! It’s a free 30-minute meeting where we talk about the financial concerns you want to take care of and the financial goals you want to achieve. There is no obligation to work with me afterward (although I do recommend taking advantage of my second free meeting too).
Disclaimer: Nothing in this blog should be considered financial advice or recommendations. Your questions are unique to you and your own personal financial circumstances. You should consult with a financial professional before making a financial decision. See full blog disclaimer.