For more than two years, most federal student loan borrowers have experienced a hiatus in student loan repayments, a pause in debt collection activities, and interest rates set at 0%. Last month, the Biden administration extended those benefits through August 31, 2022. In addition, borrowers who were previously in default will get a fresh start, with their loans restored to good standing.
Borrowers should plan to start making student loan payments again in September, but you can start preparing now. Review your student loans this month and decide what to do if you think you can’t pay them in September. Here’s what to consider.
Can’t afford federal student loan payments? What to do now
First, some good news: Since your loans are held by the federal government, you have access to many payment adjustment programs that can lower your monthly bill. This means that you are not locked in with the amount of the payment you made before the start of the break.
A lot can happen in two and a half years: maybe your rent has gone up, you’ve had a baby, you’re caring for a sick relative, or you’ve lost your job. One of the options below can probably help ease your student loan payments.
1. Consider income-based reimbursement
Start by looking at the income contingent repayment (IDR) plans available. This is usually the best way to reduce your long-term student loan repayment, as it also cancels out any remaining balance after 20 or 25 years. Your monthly payment will be determined by your discretionary income and the size of your family. IDR plans come in four main varieties:
- Income-Based Reimbursement: Pay 10% or 15% of discretionary income for 20 or 25 years, depending on when you first borrowed.
- Reimbursement based on income: Pay 20% of Discretionary Income or what you would pay on a 12-year repayment plan (whichever is less), for 25 years.
- Pay as you earn: Pay 10% of Discretionary Income, limited to what you would pay on the standard 10-year plan, for 20 years.
- Revised Pay As You Earn: Pay 10% of discretionary income for 20 years (if repaying only undergraduate loans) or 25 years (if repaying graduate loans).
There are several differences between the plans, including the types of student loans eligible for each. You can see which plans you might qualify for with Federal Student Aid’s Loan Calculator tool.
You can also ask your student loan officer for advice on what is best for your situation. Or you can check the box on the IDR application requesting that Federal Student Aid place you on the plan with the lowest monthly payment.
If you were already on an IDR plan when the pause began, your payment will be the same once payments resume. However, you can choose to recertify your earnings before the break ends if your earnings have decreased. This could give you a lower payment from September.
You can even report your income yourself without submitting a tax return (if you all have direct loans). The self-declaration feature is a pandemic relief measure that will end on February 28, 2023.
2. Adjust your repayment schedule
Another option, which won’t result in a discount, is to extend your repayment term to get a lower monthly payment. You can consolidate federal loans, for example, into one simplified monthly payment. This will extend your repayment term up to 30 years, depending on your balance. However, extending the repayment period is a trade-off: you can lower your monthly payments, but you’ll pay more interest over the life of your loan.
If consolidation isn’t right for you, you can switch to the extended repayment plan if you have more than $30,000 in qualifying federal loans. You will have the choice between fixed or progressive payments, which will increase over time, probably as your income increases. The extended repayment offers a term of 25 years.
A downside of the Extended Repayment is that it is not an eligible plan if you are working on Public Service Loan Forgiveness (PSLF). This program provides a tax exemption after 120 payments if you work full-time for an eligible public service employer. Carefully consider the pros and cons of any new repayment plan before making a change.
3. Choose an additional tolerance or postponement
Let’s say you’re worried about payments in September 2022, but you imagine you can get back on track in three or six months. In this case, forbearance or deferment – two ways to take a temporary break in payments – are additional options. The main difference between the two is that during the deferral, interest will not accrue on subsidized federal loans.
There are several forbearance and deferment programs, including for unemployed borrowers; those with financial difficulties; those participating in a graduate scholarship, medical residency, or AmeriCorps; and more. Your loan officer can help you determine which program you qualify for.
But keep in mind that since, in most cases, interest will accrue during this suspension of payments, you will likely owe more at the end of the deferment or forbearance period. This is why IDR plans are usually the best option if affordability is an issue: your payment will be reduced permanently and you will get a discount on your balance at the end of the repayment term.
4. Consider Pardon or Discharge
You may qualify for a loan forgiveness or release program that will eliminate your remaining balance after a period of time.
In addition to getting forgiveness through an IDR plan, you may qualify for loan forgiveness depending on your job, particularly if you work in a public service or helping profession. Options include PSLF, state and federal programs for healthcare workers, school- or state-based loan forgiveness and repayment assistance programs, and loan repayment assistance programs employer-based.
Federal loan release is available if your school closed while you were in school or shortly after graduation, if you were the victim of college fraud, if you are totally and permanently disabled or, in some cases, if you go bankrupt. You will likely need to apply for a waiver and show proof of your eligibility. If you qualify, the associated federal loans will be forgiven.
Contact your loan officer before payments resume
There’s an important step to take no matter how you decide to handle the payments when the federal student loan break ends.
To avoid inadvertently missing your first payment when they resume, make sure your student loan officer has your up-to-date contact information. You may have a new servicer, as some have terminated their contract with the US Department of Education as payments have been frozen. It is therefore very important to check and confirm that you know which company to expect updates from.
Find your student loan officer by logging into Federal Student Aid with your Federal Student Aid ID (FSA ID). You will also find the contact details of the repairer there. If you haven’t done so already, create an account on your repairer’s online portal, verify that all the information there is correct, and sign up for automatic payment, if applicable.
Even if you made automatic payments before the payment pause started, you’ll likely need to turn automatic payment back on before it ends, according to the Department of Education.
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