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If you haven’t made payments on your federal student loan since the COVID-19 pandemic, your monthly bills are about to climb.
The U.S. Department of Education announced it will begin moving 1.8 million borrowers into repayment plans beginning on May 5, 2025, putting an end to the payment pause that began more than five years ago. It will also begin collecting payments on federal student loans that are in default.
According to the government:
- 42.7 million borrowers currently owe more than $1.6 trillion in student loans.
- More than 5 million borrowers have not made a monthly payment in over 360 days and sit in default — many for more than 7 years — and 4 million borrowers are in late-stage delinquency (91-180 days).
- Only 38 percent of borrowers are in repayment and current on their student loans.
When a borrower has not made payments on a loan for 270 days, it is considered in default and becomes eligible for mandatory collections.
That, in turn, allows the government to garnish the borrower’s wages, income tax refunds, and Social Security benefits until that debt is repaid. The borrower may also incur collection costs.
The government stressed that efforts to collect on student loan debt “will be paired with a comprehensive communications and outreach campaign to ensure borrowers understand how to return to repayment or get out of default.”
But millions of borrowers will likely find themselves struggling to work student loan payments back into their budget.
How to manage your student loan payments
Financial professionals say borrowers should explore every avenue available to help make their payments more affordable. That may include:
Such options may not be available for all borrowers, but they are all worth investigating.
Defaults have consequences
Loan defaults can have dire long-term consequences. For starters, it will damage the borrower’s credit score, which means that they are more likely to pay higher interest rates on credit cards, home and auto loans, and other forms of consumer credit in the future.
According to the U.S. Department of Education, you may also have trouble:
- Signing up for utilities.
- Securing homeowners insurance.
- Obtaining a cellphone plan.
- Getting approval to rent an apartment (because credit checks are generally required).
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.
In the case of federal student loans, as noted, a default can also result in wage garnishment, collection fees, and future income being withheld from tax refunds and Social Security benefits. 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 would prefer to have their loans paid back rather than go into default, and they 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 loan, although it remains unclear how those options will be affected under the new Department of Education collection policy. Income-driven repayment programs, for example, previously capped payments at anywhere from 10 percent to 20 percent of the borrower’s 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 essentially amounts to 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. (Learn more: Pros and cons of student loan refinancing)
Interest rates have climbed substantially in recent years, limiting the appeal and practicality of this option. Still, especially with a recent decline in interest rates, 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 still elevated, 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 student loan relief programs could present potential problems for millions of 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.
Discover more from MassMutual …
Ways to reduce your student loan debt
Paying off student loan debt vs. saving for retirement
Repaying student loans early: How to do it right
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