Borrowers are set to resume payments on their federal student loans Sept. 1 after more than three years of forbearance that began during the COVID-19 pandemic. The end of the payment pause comes after the Supreme Court struck down the Biden Administration’s plan to forgive up to $20,000 for some of the 43 million Americans who borrowed to attend college and still owe.
It’s a double hit for borrowers hoping for continued financial relief.
During the payment pause, interest rates were placed at 0%. They’ll return to their current fixed rates when repayment begins. Despite the U.S. Department of Education announcing earlier this year that the payment pause, which had been extended multiple times, was coming to an end, experts say they fear some borrowers did not adequately prepare for repayment. That’s particularly true for those who were counting on loan forgiveness.
With student loan repayments set to resume, “there’s going to be a lot of angry people,” says John Pelletier, director of the Center for Financial Literacy at Champlain College in Vermont.
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Even for the most prepared borrowers, the adjustment will likely be difficult. After digesting the news of the student loan forgiveness plan being struck down, it’s time for borrowers to start formulating a repayment strategy if they haven’t already, says Emily Irwin, senior director of advice at Wells Fargo Bank.
“Taking action around things you can control will best prepare you financially and mentally to re-engage in the repayment of your student loans,” she says.
In response to the Supreme Court’s decision, the Education Department announced several plans to help ease borrowers back into repayment, including a one-year “on-ramp” during which missed, partial or late payments will not lead to negative credit reporting, default or loans being sent to collection agencies. The provisions start Oct. 1, 2023 and will last for up to 12 months, through Sept. 30, 2024.
However, missed payments won’t count toward loan forgiveness under any of the income-driven repayment plans or Public Service Loan Forgiveness.
The Biden Administration also announced it has begun the process of pursuing another federal student loan debt forgiveness plan using the Higher Education Act of 1965, which includes a necessary “negotiated rulemaking” process that involves a public hearing.
On July 14, the Education Department began notifying more than 804,000 borrowers who were on an income-driven repayment plan that at least some of their federal student loan debt will be discharged, with the process starting in the coming weeks. Some borrowers may see their entire balance wiped out.
As loan payments resume, spending and saving habits will likely have to change dramatically for many people, Pelletier says.
“Maybe they’ll go out to eat less. Maybe they won’t be able to take a trip next year,” he says. “People are going to have lifestyle changes.”
For borrowers entering repayment or beginning their student loan payments for the first time, here are seven things to do to help navigate the transition.
Identify and Contact Your Loan Servicer
During the forbearance period, several federal student loan servicers consolidated with other companies, so loans for many borrowers may be managed by a different servicer than when they last paid. Experts say borrowers should ensure they haven’t overlooked or deleted emails that may have come from their new servicer regarding their student loans.
If borrowers are unsure who their servicer is now — and they may have more than one — they can find that information by logging in to the Federal Student Aid website. Experts say borrowers should then log in to their account with their servicer and confirm the accuracy of their contact information.
Servicers will likely be inundated with phone calls as repayment resumes, and CNN reported that some are cutting call-center hours. Experts say borrowers should contact servicers with questions sooner rather than later and make any necessary changes to their repayment plan.
Experts also suggest setting up automatic payments to ensure regular on-time payments.
Make a Budget and Cut Expenses
Any repayment strategy requires a budget, Irwin says. If borrowers don’t have one that accounts for future loan payments, creating one is a crucial first step.
First, assess where your income is coming from and how much you can count on each month, along with any other expected sources of income, like gifts, she says. Then, calculate how much money is going out and where it’s going. After identifying fixed expenses on necessary things like rent or mortgage payments, insurance and car payments, along with variable expenses on other essentials like gas, groceries and even entertainment, identify discretionary income that’s used on nonessential purchases that can possibly be cut.
“Take a very fine-tooth comb on both a monthly and an annual basis looking at those expenses,” she says. “That’s your baseline. That’s where you’re going to start with your budget.”
Be sure to account for any future necessary expenses when creating a budget, Pelletier says.
“With regard to anyone just starting out, you do want to put aside money in a rainy day fund to cover three months of expenses just in case something happens like COVID, you get laid off, you have an illness or you have an auto repair that’s not covered by a warranty,” he says.
Look for a PSLF-Qualified Job
Though President Biden’s one-time student loan forgiveness plan is off, some borrowers are eligible for loan forgiveness through various programs, like PSLF. Those who work in a qualifying job for a qualifying government or nonprofit organization for 10 years can have remaining federal loan debt forgiven as long as qualifying monthly minimum payments have been made during that time.
During the payment pause, the Department of Education also expanded eligibility for PSLF, though applications had to be submitted by Oct. 31, 2022.
[READ: A Guide to Federal Student Direct Loan Consolidation]
Borrowers who were holding out for debt forgiveness might want to look for full-time work with a company or organization that would qualify them for PSLF. To see if an employer meets the qualifications, use the PSLF Help Tool on the FSA website.
It’s also worth noting that some employers that don’t qualify for PSLF might still provide student loan payment relief or benefits to help employees pay that debt, says Chris Walters, founder of GradFin, a student loan advising company.
Explore Income-Driven Repayment
Budget-conscious borrowers or those with low income may be interested in pursuing one of several income-driven repayment options, which generally equate to payments of 10% to 20% of a borrower’s discretionary income to make monthly payments more affordable. There are also options for $0 monthly payments for borrowers whose income is low enough.
However, lower payments can lengthen the term of a loan, which can increase the interest amount and be more costly for borrowers, depending on their incomes over the long term. Also, when the balance on income-driven repayment plans is forgiven after 20 or 25 years, that amount is considered taxable income.
[READ: 7 Tips to Pay Off Multiple Student Loans]
“Understand that income-driven repayment plans, while beneficial for your monthly payment, have the consequence of negative amortization, meaning you’re upside down on your payment,” says Bob Collins, vice president of financial aid at Western Governors University. “Your income is low enough that the amount of your payment won’t even reduce your principal balance and may not cover all of your interest. In that situation, your loan balance continues to grow every time you don’t reduce your principal balance.”
In June 2023, Congressional lawmakers introduced a bill called the Federal Assistance to Initiate Repayment Act, which aims to stop “runaway interest” and negative amortization for those on income-driven repayment plans.
The income-driven repayment adjustment launched by the Biden Administration in July 2023, which was initially announced in April 2022, seeks to accurately account for the number of monthly payments a borrower made that qualify toward forgiveness under an income-driven repayment plan.
Borrowers are eligible for forgiveness after 20 or 25 years of qualifying months, with the number of required payments varying based on when a borrower first took out the loans, the type of loans that were borrowed and the income-driven repayment plan in which the borrower is enrolled. The Education Department says thousands of borrowers were not credited correctly for qualifying payments.
“Inaccurate payment counts have resulted in borrowers losing hard-earned progress toward loan forgiveness,” the White House wrote in a July 14 press release. “This action also addresses concerns about practices by loan servicers that put borrowers into forbearance in violation of Department rules.”
Borrowers who will be receiving notification of income-driven repayment adjustments from the Education Department include those with federal direct loans or Federal Family Education Loans who have met the necessary threshold for payments for any of the following periods:
— Any month in which a borrower was in a repayment status, regardless of whether payments were partial or late, the type of loan or the repayment plan.
— Any period in which a borrower spent 12 or more consecutive months in forbearance.
— Any month in forbearance for borrowers who spent 36 or more cumulative months in forbearance.
— Any month spent in deferment (except for in-school deferment) prior to 2013.
— Any month spent in economic hardship or military deferments on or after January 1, 2013.
The plan could cost around $475 billion over a 10-year budget window, according to the University of Pennsylvania‘s Penn Wharton Budget Model. It also could face legal challenges.
No action is required of those receiving notice of forgiveness. However, borrowers can choose to opt out of the discharge and resume regular payments by contacting their loan servicer.
See if You Qualify for Forbearance or Deferment
In situations where an income-based repayment plan is undesirable long term, deferment or forbearance may be a better option for those who qualify, Irwin says. The government will pay the interest on subsidized federal student loan payments in deferment, but borrowers are on the hook for interest with unsubsidized and PLUS loans.
Forbearance suspends loan payments, similar to a deferment, or reduces them temporarily, but interest continues to accrue. When repayment begins, the interest is added to the loan principal, called capitalization, which means the borrower will be paying interest on interest with a higher loan balance.
Borrowers should consider the announced relaxation on missed, late or partial payments by the Department of Education when deciding if deferment or forbearance is right for them.
Consider the SAVE Repayment Plan
Following the Supreme Court ruling, the Education Department also announced the creation of the Saving on a Valuable Education Plan, which will go into effect later in the summer of 2023.
This income-driven repayment plan will cut monthly payments to $0 for millions of borrowers making $32,800 or less, or $67,500 for a family of four, though those amounts are higher in Alaska and Hawaii. Borrowers who earn more than those amounts may still see $1,000 per year in savings on their payments, according to the Education Department. The plan also seeks to stop interest charges that can leave borrowers owing more than their initial loan.
For undergraduate loans, the plan will raise the amount of income that is considered discretionary income and will cut monthly payments from 10% of discretionary income to 5%. For borrowers with original loan balances of $12,000 or less, the plan will forgive loan balances after 10 years of payments instead of 20 years.
All student borrowers in repayment will be eligible to enroll in the SAVE plan before month payments are due. Borrowers who sign up or are already signed up for the current Revised Pay as You Earn plan will be automatically enrolled in SAVE once the new plan is implemented, the White House announced.
More information about the plan and its eligibility can be found on the FSA website.
Look For Extra Income Streams
For borrowers worried that their regular income might not cover the added expense of student loan payments once they resume, landing an additional job or gig position can help make up the difference and provide some breathing room.
“If you have the ability to find part-time or other full-time work, gig type of income, that will increase your cash inflow, which will make it easier for you to make these payments,” Irwin says.
Trying to fund your education? Get tips and more in the U.S. News Paying for College center.
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The Student Loan Payment Pause Is Ending: 7 Things to Do originally appeared on usnews.com
Update 07/18/23: This article was published at an earlier date and has been updated with new information.
