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Millions of borrowers may be feeling the pinch when payments on their federal student loans resume this fall.
Indeed, after a three year pause the Department of Education announced it will begin collecting federal student loan payments again in October. But interest will begin accumulating sooner — beginning Sept. 1. Payments and interest have been paused since March 2020.
To help ease the transition, the White House announced a new income-based repayment plan called Saving on a Valuable Education (SAVE) that may cut some borrowers’ previous payments in half and qualify many more for zero monthly payment. Parts of the plan will not take effect until July 2024.
Financial professionals suggest borrowers should take steps now to build student loan payments back into their budget. That may include:
Such options may not be available for all borrowers, but they are worth investigating.
Pandemic relief fading
Following the COVID-19 outbreak and the resulting economic downturn, payments and interest on all federal student loans were temporarily suspended under the relief program outlined in the CARES Act.
That allowed some 40 million student borrowers to pause payments without interest on their federally held student loans, including Federal Family Education Loan and Direct Loan programs, during the COVID-19 crisis.
The White House extended the federal payment pause a total of eight times, through two administrations, giving borrowers a much-needed reprieve amid the financial fallout from the pandemic. But those extensions have officially come to a halt.
Once payments resume in October, however, the White House said borrowers will be given the chance to enroll in a 12-month "onramp repayment program," during which time any borrowers who fall behind on payments will not be reported to credit agencies, placed in default, or referred to debt collection agencies.
Additionally, the White House said loans covered by an income-driven repayment plan, where monthly student loan payments are based on income and family size, would be forgiven to correct problems in the way payments were calculated over the years. This forgiveness, amounting to about $39 billion, will affect roughly 800,000 borrowers.
Note that the Supreme Court in late June 2023 struck down a separate student loan debt forgiveness program proposed by the White House that would have canceled $10,000 of federal student loan debt for borrowers earning less than $125,000 ($250,000 for married couples who file taxes jointly). Under the proposed plan, Pell Grant recipients would have also been eligible for up to $20,000 in loan forgiveness.
Arguments about student loan forgiveness programs continue in the top levels of government.
A substantial number of borrowers with federal student loans may struggle with monthly payments as the pandemic-era relief measure comes to an end in late October, which could increase their risk of default.
To minimize the risk of default, borrowers should be sure that they select the loan repayment option that works best for them. For example, an income-based repayment plan caps loan payments based on a portion of their income. In some cases, that payment obligation may be as little as $0.
Default can be costly
Default can have dire long-term financial consequences. For starters, it will damage your credit score, which means you are more likely to pay higher interest rates on credit cards, home and auto loans, and other forms of consumer credit. According to the U.S. Department of Education, you may also have trouble:1
- Signing up for utilities.
- Securing homeowner’s insurance.
- Obtaining a cellphone plan.
- Getting approval to rent an apartment (since credit checks are generally required).
If your credit score sinks low enough, you may be ineligible to borrow at all until you pay off your debt and raise your score. Negative payment information (such as collections and late payments) remains on your credit report for seven years, while Chapter 7 bankruptcies remain for up to 10 years.2
In the case of federal student loans, a default can also result in wage garnishment, collection fees, and future income being withheld from tax refunds and Social Security. The entire unpaid balance of your loan and any interest you owe would immediately become due (called acceleration), you would no longer receive deferment or forbearance, and you would lose eligibility for other benefits, including the ability to choose a repayment plan, the Department of Education reports.
Negotiating with lenders
Lenders, who would prefer to have the loans they extend paid back rather than go into default, will often work with distressed borrowers to allow for the repayment of a loan on different terms.
In the case of the federal government, various programs allow for deferment or changing repayment schedules depending on the type of loans. Income-driven repayment programs are also available, which cap payments at anywhere from 10 percent to 20 percent of your discretionary income based on the borrower’s income and family size.
For private student loans, the terms are set by each individual lender. But many lenders will negotiate interest and repayment options if approached. Leniency often depends on the borrower’s income and repayment history.
Refinancing options, rate locks
While refinancing a private student loan does not eliminate the principal debt obligation, it can make repayment more manageable and chip away at the interest expense. That’s because refinancing amounts to essentially taking out a new loan to repay your old loan, but ideally at a lower interest rate. And a lower interest rate can mean substantial savings over time.
But interest rates have climbed substantially, limiting the appeal and practicality of this option. Still, some refinancing institutions may be able to offer rates either directly or through various programs that can be attractive for certain student borrowers, depending on the financial terms of their current loans.
Additionally, some refinancing companies will allow borrowers to “lock in” a rate quote, much like a mortgage. That gives a borrower time to consider the option.
Be aware that refinancing could alter the repayment terms for individual loans, depending on the type of loan you have. And with interest rates trending higher, there may be other implications to the cost of your loan. Borrowers would be wise to consult a financial professional for guidance.
Understanding the terms of your student loans as well as the refinancing possibilities is critical. (Related: Understanding student loan refinancing)
Your employer?
Many companies offer student loan repayment assistance as part of a benefits package. In fact, such programs are becoming a popular recruiting and retention tool for some industries. And it can potentially save you serious money.
Ask your human resources department if your employer has such a program and, if so, what the terms are. Oftentimes, such programs are only available after a certain period of employment or may have been implemented after you signed on. If no program exists, you may want to ask your employer whether such a program could be considered or whether help might be provided on an individual basis.
Conclusion
The end of COVID-19 relief programs could present potential problems for millions of student loan borrowers. Anyone concerned about incorporating student loan payments back into their monthly budget should consult their lenders, consider refinancing, and review their employee benefits to forestall negative consequences as much as possible.
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This article was originally published in January 2021. It has been updated.
1 U.S. Department of Education, “Student Loan Delinquency and Default.”
2 Bankrate, “How long does it take to raise your credit score?” May 22, 2023.