The pause on student-loan payments is extended through Aug. 31

WASHINGTON — In a widely anticipated move, President Joe Biden on Wednesday extended the suspension of federal student loan payments through Aug. 31, marking the sixth extension in the two years since the moratorium began because of the pandemic.

Payments had been slated to resume in May, but about 41 million people will now have a few more months without interest accruing on their loans. The administration also said it will help 7.5 million people exit default on their federal student loans, sparing them from the seizure of wages, tax refunds, and Social Security benefits.

“We are still recovering from the pandemic and the unprecedented economic disruption it caused,” Biden said in a statement Wednesday. He added that the “additional time will assist borrowers in achieving greater financial security and support the Department of Education’s efforts to continue improving student loan programs.”

Congressional Democrats had urged the administration to extend the pause, arguing that the resumption of payments would financially destabilize many borrowers who are not prepared to shoulder another bill amid skyrocketing costs for food and gas. Republicans have opposed the move as an unnecessary giveaway at a time when Biden claims the economy is on solid footing.

“If loan payments were to resume on schedule in May, analysis of recent data from the Federal Reserve suggests that millions of student loan borrowers would face significant economic hardship, and delinquencies and defaults could threaten Americans’ financial stability,” Biden said.

Economists say restarting student loan payments would squeeze the personal finances of millions of adults. About $7.5 billion in student loan payments was waived each month for the last two years, according to a new analysis from the Federal Reserve Bank of New York. The massive forbearance program helps explain why, according to the JPMorgan Chase Institute, most families had more in their bank accounts at the end of 2021 than they did when the pandemic began.

More than four out of every five of those who borrowed directly from the government made little or no progress paying down their debt during the freeze, New York Fed data shows, and only 5% paid down more than $5,000.

Compared with rent or mortgage payments, “student-loan forbearance is a smaller monthly debt payment, but it is more meaningful for lower-income families,” said Fiona Greig, the institute’s co-president.

Renewed student loan payments would force many Americans to cut down on their spending or savings just as the saving rate, or the share of Americans’ after-tax income that went to savings or investment, plunged this year to its lowest rate in almost a decade.

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“Many borrowers will have to lower their consumption once the student loan repayment moratorium ends, which will effectively slow down economic activity and therefore will impact everyone,” said Dora Gicheva, an economist at the University of North Carolina at Greensboro.

Gicheva said she also expects credit card debt to rise - people turn to credit cards to help make ends meet when they’re paying student loans, according to a forthcoming analysis in the Journal of Money, Credit and Banking by Gicheva and Florida International University economist Berrak Bahadir.

But for now, borrowers will have some breathing room.

Among those benefiting are people who before the pandemic had not made a payment on their federally held loans for nearly a year — defaults that would typically place them at risk of the federal government withholding a portion of their income. Instead, Congress gave those borrowers a pathway to bring their loans back into good standing.

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A provision in the Coronavirus Aid, Relief and Economic Security Act, or Cares Act, ensured that each month of suspended payments would count toward student loan rehabilitation, a federal program that erases a default from a person’s credit report after nine consecutive payments. Based on the duration of the moratorium, borrowers have satisfied the terms of the program and are eligible to exit default.

But to make that exit, the Education Department typically requires defaulted borrowers to submit an application, a step that consumer groups worry will result in people slipping through the cracks. Advocates and lawmakers are also concerned that people who have rehabilitated their loans in the past and re-defaulted would be shut out because the program is supposed to be a onetime offer.

Education Secretary Miguel Cardona has agreed to waive the program requirements and restrictions, which ensures that people have their negative credit histories cleared without losing the ability to rehabilitate their loans. The decision covers all loans affected by the payment pause, including defaulted federal debt held by private companies — known as commercially held Federal Family Education Loans. The department said additional details will be released in the coming weeks.

“The Department of Education is committed to ensuring that student loan borrowers have a smooth transition back to repayment,” Cardona said in a statement Wednesday. “This additional extension will allow borrowers to gain more financial security as the economy continues to improve and as the nation continues to recover from the COVID-19 pandemic.”

Rep. Virginia Foxx, of North Carolina, the top Republican on the House Education and Labor Committee, has criticized the execution of what the administration has dubbed “operation fresh start.” Foxx said the Education Department has not briefed or discussed its plans with Congress or its student loan servicers.

“The Biden administration continues to govern by executive fiat without any consideration for the consequences of its actions,” Foxx said in a statement on Wednesday. “This ambiguous and flippant rollout will lead to mass confusion among borrowers likely causing new defaults. This is what happens when reckless ambition supersedes common sense.”

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The White House had signaled that another extension was in the works. In an appearance on the podcast Pod Save America in early March, White House Chief of Staff Ron Klain said the president would decide whether to use his executive authority to cancel student debt “before the pause expires, or he’ll extend the pause.” Days later, the Education Department told student loan servicers who manage its portfolio to stand down on sending notices to borrowers about the May resumption.

Encouraged by the moves, the heads of the Senate and House education committees - Sen. Patty Murray, D-Wash., and Rep. Robert C. “Bobby” Scott, D-Va. - ratcheted up pressure for the administration to act. Murray said another extension would give the Education Department more time to fix the repayment system with better options for people to manage their debt.

Republicans were initially on board with the payment pause but have cooled to the policy as the economy has recovered and the cost surpasses $100 billion.

Congressional Democrats, meanwhile, praised the White House decision, with some also renewing calls for Biden to wipe away some of the $1.6 trillion in federal loans held by millions of Americans.

Senate Majority Leader Chuck Schumer (D., N.Y.) issued a joint release with seven other lawmakers, including Sen. Elizabeth Warren (D., Mass.) and Rep. Ayanna Pressley (D., Mass.), urging Biden to take further steps.

“While the extension is welcome, a looming restart of student loan payments in September underscores the importance of swift executive action on meaningful student debt cancellation,” the lawmakers wrote. “We continue to implore the President to use his clear legal authority to cancel student debt, which will help narrow the racial wealth gap, boost our economic recovery, and demonstrate that this government is fighting for the people.”

The new extension means borrowers with student loans from the Education Department will see payments automatically suspended without penalty or accrual of interest for the duration of the moratorium. Collections on defaulted loans will still be halted, and any borrower with defaulted federal loans whose wages are being garnished will receive a refund.

The Trump administration in March 2020 gave borrowers the option of postponing payments for at least 60 days as the coronavirus pandemic battered the economy. Congress later codified the reprieve with the Cares Act, and made it automatic. The Trump administration twice extended the moratorium before leaving office, and Biden’s White House has now done so four times.