Millions of Americans will see their expenses rise sharply this fall. Federal student loan payments are back after a pause of more than three years. Interest will start accruing again on 1 September and borrowers will make their first payments in October.
More than 40 million Americans have federal student debt, averaging about $37,000 a borrower. While Joe Biden’s loan forgiveness program was blocked by the supreme court earlier this year, other changes have been made to help borrowers chip away at their debt.
The Guardian talked to three student loan experts and asked them for their advice about payments restarting. Here’s what they had to say.
Where to start
Borrowers should have already heard from their loan servicer about exactly when their payments will resume. If you haven’t heard from your service, check the studentaid.gov website to see if you need to change your contact information.
Some people might also find they have a new servicer after multiple providers ended their contracts with the federal government and some accounts were automatically transferred to new providers.
Once you find your servicer and know your balance, “start checking what your payments are going to be and see if that fits not only within your monthly budget, but also your long-term student loan repayment strategy”, said Betsy Mayotte, the president and founder of The Institute of Student Loan Advisors.
Create a new repayment strategy
Changes over the last three years – from getting a new job to taking on a mortgage for a house – can impact what strategy borrowers want to take on to tackle their student debt.
The federal government created new and refreshed old forgiveness programs that would allow some people to have their loans eventually forgiven depending on their income and occupation. Borrowers can use the federal government’s loan simulator tool to start exploring what program they can join for their repayments.
The White House introduced a new income-driven repayment (IDR) plan called the Saving on Valuable Education (Save) plan that sets monthly payments at a set portion of a borrower’s income and household size. The loan will be forgiven after a certain number of years of monthly payments.
Experts say the IDR plan is the best that has been offered by the federal government so far, cutting down the percentage of discretionary income used for monthly payments for many borrowers. Some low-income borrowers will have payments of $0.
Looking into “an income-driven repayment plan is probably the most powerful thing [borrowers] can do, because what their options were three years ago are going to be entirely different than what they are now”, said Lindsay Clark, the head of external affairs at Savi, a startup that is developing a student loan navigator tool.
The 40 months of the payment pause also counts toward forgiveness, making IDR and other forgiveness plans especially valuable to enroll in. This means borrowers in the Public Service Loan Forgiveness (PSLF) 10-year forgiveness program – meant for those who work for government or certain non-profit organizations – are a third closer to forgiveness.
Not every borrower will want to enroll in an IDR or forgiveness program, Mayotte noted. For example if a person’s income is much higher than their loan balance, a standard repayment plan might work better.
“There’s never a single answer for all borrowers,” she said.
Once a borrower has a payment strategy set in place, Mayotte recommends revisiting it every year at tax season.
“I want people to get into the habit of checking and reevaluating their student loan strategy at tax time. Even [with] a difference of two or five years, priorities can change, financial situations can change. Maybe you’re saving for a down payment for a house, so you want your payment to be as low as possible,” Mayotte said. “Maybe you can afford to throw more at the loan.”
What to do if payments will be hard to make
For many, restarting payments will be the end of much-needed relief from debt. The Consumer Financial Protection Bureau (CFPB) released a report earlier this summer that found one in 13 student loan borrowers are currently behind on other payments, while one in five have risk factors that suggest they could struggle when payments resume.
Acknowledging this, the White House is creating an “on-ramp” to repayment that will go on until 30 September 2024. Until then, borrowers who miss monthly payments will not be considered delinquent, placed in default, referred to collection agencies or have their loans reported to credit bureaus. Interest will continue to accrue during the on-ramp period.
Experts say this allows strapped borrowers more time to explore their options, but people should still try to make their payments as best as they can.
“Don’t misinterpret this on-ramp as a ‘get-out-of-jail-free’ card. But if you’re struggling and in a situation where it’s especially difficult [to make payments] and you need a period of adjustment to figure out what options might be available … it is a tremendous benefit,” said Bruce McClary, a senior vice-president at the National Foundation for Credit Counseling, a non-profit credit counseling service.
McClary recommends researching specific IDR programs and, if necessary, about forbearance.
“That way, you can have a better-informed discussion with your servicer should you ever have to call them and ask questions about these programs when you need them,” he said.
For example, a one-time program called Fresh Start allows borrowers who have defaulted on their federal student loans to go back to good standing if they sign up for the program. Once accepted, a loan will be transferred back to a service and a record of default will be removed from a person’s credit report.
Borrowers can also seek financial counseling advice from a nonprofit organization. The National Foundation for Credit Counseling connects borrowers with counselors from a network of agencies. The Institute for Student Loan Advisors takes questions over email for borrowers looking for more advice on how to handle their debt.
What happened to student loan cancellation?
The elephant in the room as payments begin again is that this time last year, many borrowers were hopeful that a huge chunk of their loans would be forgiven under Biden. But the supreme court blocked the plan earlier this summer, essentially ending any possibility for forgiveness in the near future.
The Biden administration said it is exploring other ways to get forgiveness to borrowers, but with division in Washington, there is no guarantee forgiveness will be seen anytime soon.
Still, borrowers should feel safe in the forgiveness programs that are being offered now. Even as Washington evolves, those who enter the program now can safely bet on them sticking around.
“Even if there was another administration that came in and tried to change that program, any borrower who had loans first are grandfathered in,” Clark said. “The same thing goes for those income-driven repayment plans: it’s written into law.”