What Happens If You Don’t Pay Off Your Student Loans Before the Pandemic Ends?

When the government suspended payments and interest on all federal student loans during the coronavirus outbreak, it became a free pass for many borrowers.

But some people have had a hard time getting their questions about capitalization answered: this is what happens when your interest is added to the principal, which means you end up paying interest on your interest. Capitalization increases the cost of loans to pay for tuition in the long run.

Federal unsubsidized loans are usually capitalized after a six-month grace period after graduation, so we generally recommend that you start paying off your loans as soon as possible. But after that, you usually don’t have to deal with all caps if you keep an eye on your monthly tab.

Here’s what you should know about your credit situation and whether you will experience capitalization if you decide to stop making payments during a pandemic:

If you paid back the loan every month – and you had ongoing payments before March 12, 2020 – you will not start accruing interest until September 2020 and no capitalization will take place .

However, an official from the Ministry of Education said that interest accrued before March 12 may be calculated after September 30 if your loan was already in the deferral or abstinence program.

“The expiration of the administrative leniency associated with COVID-19 could trigger a restriction event based on the individual circumstances of the borrower,” the official said in an email (allocated to them).

Here’s a scenario where you don’t experience capping:

The borrower has a current repayment status pending the application of the COVID-19 administrative grace period.

  • As of March 12, 2020, the borrower must pay $ 10,000 in principal and $ 2.50 in interest.
  • From March 13, 2020 to September 30, 2020, the borrower is subject to an administrative grace period with no cap.
  • From March 13, 2020 to September 30, 2020, no interest is charged due to the 0% interest rate.
  • On October 1, 2020, the borrower owes $ 10,000 in principal and $ 2.50 in interest. No capital letters are used

Here is a situation where you will experience capping events:

The borrower is on unemployment grace pending the COVID-19 administrative grace period. This deferral was to cover the period from January 21, 2020 to July 21, 2020 (ending before the end of the COVID-19-related administrative leniency period).

  • If the COVID-19 emergency had not occurred, that borrower’s interest would have been capitalized at the end of the unemployment grace period on July 22, 2020.
  • As of March 12, 2020, the borrower is required to repay the principal amount of US $ 10,000 and US $ 73.25 in interest. $ 73.25 is interest accrued during the grace period until March 12, 2020.
  • The borrower receives an unlimited administrative grace period from March 13, 2020 to September 30, 2020. The department is cutting the grace period for unemployment until the end of March 12, 2020; The unemployment deferral is being replaced by an administrative deferral related to COVID-19.
  • From March 13, 2020 to September 30, 2020, no interest is charged due to the 0% interest rate.
  • Capitalization that could have occurred earlier at the end of the unemployment grace period (July 22, 2020) is postponed until the end of the administrative grace period.
  • As of October 1, 2020, the borrower owes $ 10,073.25 in principal and $ 0.00 in interest. The capitalization occurred as a result of the end of the grace period, but at a later time than it would have been if abstinence had not been applied.

In short: if you paid off the loans on your regular repayment plan before mid-March, your interest probably won’t be capitalized. If you have not paid for any reason, ask your loan officer to clarify your status.

It is best when communicating with your student loan support team to ask for everything in writing – which is best practice in general, but especially during this confusing time. If you don’t understand what the service staff is telling you, ask questions (please be polite) until you do.

Remember, a lot has changed in a short period of time when it comes to managing your student loans, and the customer service representatives are trying to figure out all the details of the changes as quickly as you do.

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