Here’s How This Borrower, With $170,000+ In Student Loan Debt, Is Taking Advantage of the Latest Freeze Extension

A photo to accompany a story about the latest student loan moratorium extension Courtesy of Marielle Tomlin
Marielle Tomlin has taken advantage of student loan freeze extensions to make extra payments toward her $170,000+ debt balance.
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Marielle Tomlin has taken advantage of student loan payment freezes to pay off over $50,000 in student loan debt. And she’s excited to have an extended opportunity to continue chipping away at her student debt.

The Biden-Harris Administration has extended the pause on payments, interest, and collections through Aug. 31, 2022. The latest freeze gives Tomlin, and millions of others with student loans, a fresh reprieve from the burden of monthly payments. 

Now is a great time to take advantage of the additional financial flexibility, but don’t count on it being a permanent situation because experts don’t believe blanket student loan forgiveness is likely.

Not having to pay interest has energized Tomlin and allowed her to fast track paying down her $170,000+ in student debt. This has motivated her to keep paying more, she says. Tomlin started off paying $500 a month and kept bumping it up from there, putting large chunks of the money she made from her midwifery practice toward her student loans. “I kinda feel like I’m racing the clock until the [no interest period] and the pause is all done,” she says.

If you’re taking advantage of this student loan freeze, here’s what you need to know about the pause and how to take advantage of it.

There’s a ‘Fresh Start’ for Those Struggling to Make Payments

During the student loan payment freeze borrowers who were behind on payments have had all collections paused. With this latest extension, there are plans to help borrowers who are behind on payments by eliminating delinquency and default status on loans. This is a big deal that will allow somewhere around 8 million borrowers to essentially have a fresh start, says Adam S. Minsky, an attorney specializing in student loan law.

At this point, the government has yet to provide details on what this will look like and how it will work. Once this plan is put into action, it could be a boon for borrowers’ credit scores, greatly improving the chances of qualifying for a mortgage or securing a lower interest rate for all types of loans. 

However, what we don’t know is whether or not the changes in delinquency or default status will be automatically reported to the credit bureaus. If the government doesn’t release an automatic correction to your credit report, borrowers can self-advocate by writing dispute letters to their servicer and the credit reporting bureaus, says Catalina Kaiyoorawongs, co-founder of the student debt financial wellness platform LoanSense. “In some cases, your credit score can be increased by over 100 points,” she says.

How Experts Recommend Approaching This Payment Freeze Extension

Having flexibility with your student loans and not having to worry about interest accruing gives you some options. “The first thing I would have that person ask themselves is, how can I make the most of this?” says Anna N’Jie-Konte, a financial advisor and founder of Dare to Dream Financial Planning.

Here’s what the experts are saying about what you need to know about the student loan payment freeze and strategies for taking advantage of it.

Don’t Count on Blanket Loan Forgiveness

You may have extra room in your budget right now, but experts say you shouldn’t make long-term financial decisions based on that. You don’t want to commit yourself to a higher mortgage payment when you’re saving $100 or $1,000 a month by not paying student loans because, “that suddenly becomes a problem once those [student loan] payments restart,” N’Jie-Konte says.

The experts we talked to believe that total forgiveness of all federal student loan debt is unlikely to happen. It’s possible there will be some form of limited relief or an expansion of existing programs, but even that is up in the air. “I don’t think [Biden’s] going to wipe out everyone’s student loan debt, but there could be some sort of broader student loan forgiveness initiative of some kind,” Minsky says. “The administration has confirmed that that’s still under consideration.”

The Public Service Loan Forgiveness program (PSLF) has already been overhauled to enable a larger number of borrowers to qualify. For those with an eligible public service job (teacher, firefighter, nurse, etc.), a wider range of federal loans and repayment plans will count toward the PSLF requirements. If you qualify, you’ll need to apply for this limited waiver by Oct. 31, 2022.

Supercharge Your Other Financial Goals

This could be a good time to save for a down payment for a home, jump start your child’s college education fund, or pay down high-interest credit card debt. “I had one client, I think he’s paid off $50,000 in credit card debt in the last two years,” N’Jie-Konte says. She has also seen people use the extra cash as seed money for a business. “I think a lot of people are using it to fund their dream projects.”

Tomlin is taking advantage of this interest-free period to rapidly pay off her school loans. Once she’s paid off her student debt she’ll be free to work less or expand her midwifery business by hiring another midwife. “I’ll be way more flexible once my loans are gone,” she says. 

Understand How It Impacts Getting a Home Loan

Any debt will limit your ability to qualify for a mortgage and reduce the amount you can borrow by increasing your debt-to-income ratio (DTI). But student loans have a unique and complicated relationship with your mortgage application.

If your student loans are in active repayment, then your monthly payment amount is counted toward your DTI. This is true even if you have lower payments because you’re taking advantage of an income-driven repayment (IDR) plan.

However, the calculation changes if your payment is zero, which is currently the case for many borrowers. A lot of borrowers automatically assume because they’re not paying it, that the lender won’t count it, and that’s far from the truth, Kaiyoorawongs says. In that scenario, a percentage of your student loan balance is factored into your DTI. This percentage varies by loan type, but is typically 0.5% to 1% of your total loan balance. This means that for certain borrowers, not having your student loans in repayment staus can actually hinder your ability to purchase a home.

For an FHA loan the maximum DTI is generally 43%, a family making $6,000 a month could have up to $2,580 in monthly debt payments (including the future mortgage payment). If this family has $100,000 in student loans and the loans currently aren’t in repayment, then 0.5% of the loan balance counts toward their DTI, which would be $500.

In this scenario, the family might be able increase their purchasing power by putting their student loans into active repayment. If they qualified for an IDR plan with a payment of $250 a month, here’s what that would look like for a 30-year loan with a 5% mortgage rate:

Student Loan’s DTI ImpactMaximum Mortgage PaymentMaximum Mortgage Amount at 5% over 30 years*
With $0 Payment$500$2,080$345,200
With IDR$250$2,330$386,700
*According to the NextAdvisor mortgage calculator

It may sound counterintuitive, but by restarting student loan payments, some borrowers can increase their homebuying budget. And once you’ve closed on the home, you can still take advantage of the freeze on federal student loan payments. “You only have to pay [student loans] for one month. You can put yourself in pause again,” Kaiyoorawongs says.

Whether or not this strategy makes sense for you depends on your personal situation. You can apply for IDR at Studentaid.gov.