After a more than three year pandemic-induced pause, borrowers and the student-loan system are about to return to regular payments, interest and collections on the debt.
Interest will start accruing on federal student loans on Sept. 1 and borrowers will be expected to pay their first bill sometime in October. The day an individual borrower’s first payment is due will be determined by their loan-payment cycle. We have more important tips below.
Some economists expect the added bill could pose a challenge for the economy. Retailers are bracing for consumers to cut back on spending. Moody’s Analytics estimates the end of the freeze will boost student-loan payments by about $70 billion on an annualized basis. Bernard Yaros, an economist at Moody’s Analytics, said that represents a modest drag, but it likely won’t tip the economy into recession.
Still, he said, “none of that is going to diminish the pain that this is going to mean for individual borrowers.”
Indeed, other analyses indicate that a wide swath of borrowers may struggle to make payments. The median student-loan bill could push student-loan borrowers, except for those with the highest incomes, to face outflows that are larger than what they bring in, according to an analysis by the Bank of America Institute. It’s possible these borrowers may have other sources of income to help them cope because the research was focused on Bank of America accounts.
The Consumer Financial Protection Bureau has said that more than 7% of borrowers are behind on other payment obligations and about one in five student-loan borrowers have risk factors, like pre-pandemic delinquencies on student loans, indicating they’ll struggle when the freeze ends. In addition, part of the Biden administration’s legal rationale for mass student-debt forgiveness was that without it, the end of the payment pause would result in elevated rates of delinquency and default.
The Supreme Court struck down the plan this summer and though the Biden administration is taking another stab at debt forgiveness, it’s unlikely borrowers will see any relief before payments resume. Meanwhile, reforms to the student-loan system launched by the Biden administration that are intended to help borrowers are adding to their confusion as they prepare to resume payments.
Officials launched a new repayment program called SAVE and some, but not all, of its benefits will be available when the freeze ends. In addition, some borrowers who have been paying their student loans for at least 20 years are seeing their balances canceled, even as the Biden administration initiative that’s making the forgiveness possible is being challenged in court.
Amid all these announcements, borrowers are hungry for guidance, said Natalia Abrams, the president of the Student Debt Crisis Center, advocacy organization. A recent webinar hosted by the group on the new repayment plan had roughly 1,000 attendees and 500 questions. Roughly three quarters of respondents polled by the group said they’d like to receive information about student-loan payments resuming “right now” or “yesterday.”
“We’re working on our team on how we take the information that’s been given to us from the Department of Education and really break it down,” Abrams said.
Confusion and the launch of many new programs are some of the reasons why advocates, borrowers and servicers have been bracing for years for the challenges that resuming payments on this scale will pose to the student loan system.
When payments have restarted after smaller, more limited freezes, borrowers fell into delinquency and default at elevated rates. Now, tens of millions of borrowers will be seeking help with their student loans all at once, amid servicer cuts to staff and customer service hours.
“No matter how much prep or money the Department of Education and the servicers had, the system wasn’t built for 40 million people all resuming repayment at the same time,” said Betsy Mayotte, the founder of the Institute of Student Loan Advisors.
So how should you prepare? Experts outline some tips here:
1. Find out who your servicer is
During the course of the payment pause more than 17 million student-loan borrower accounts switched servicers, according to the CFPB. That means these borrowers will be sending their payments to a different organization than where they paid their bill before the freeze.
If they don’t know who their servicer is, borrowers should head to the Department of Education’s website to find out, Mayotte said. Then, they should get in touch with their servicer and make sure the organization has all of their updated contact information.
Borrowers “should be for the next couple of months opening all the things,” to make sure they don’t miss a deadline or other important information, Mayotte said.
2. If you want your payment automatically deducted from your bank account, make sure you’re signed up:
Even if your account was set up to automatically deduct your student-loan payment from your bank account each month, you’ll likely need to re-enroll. Borrowers can make sure they’re enrolled in autopay by logging into their account on their servicer’s website.
If you think you’ll be able to comfortably afford your student-loan payment each month, autopay will provide some benefits. For one, borrowers using autopay get a 0.25% discount on their interest rate. In addition, it may increase the likelihood you’ll pay on time because you won’t have to remember to make a payment.
3. Research your payment options:
Federal student loans offer myriad options for borrowers to repay. Under a standard plan, borrowers make monthly payments that are high enough for them to pay the debt down in 10 years, similar to a mortgage.
But if those payments are unaffordable, borrowers can use an income-driven repayment plan, which allows them to pay their debt as a percentage of their income and then have the remainder canceled after 20 or 25 years of payments. The Biden administration launched a new income-driven plan called SAVE that could cut down on student-loan bills for many borrowers.
Some of the benefits of the new plan will be available when payments resume this fall. For one, the government will cover any unpaid interest. Borrowers and advocates have complained for years that under income-driven plans borrowers throw money at their debt only to watch their balances grow because their payments weren’t high enough to cover the interest. SAVE aims to mitigate that issue.
In addition, under SAVE, borrowers will have more of their income protected before they’re required to start making payments. That benefit will also kick in when payments resume in October.
Despite these benefits, SAVE or another income-driven plan may not be the best option for all borrowers, Mayotte said.
“There’s no one answer for every borrower,” Mayotte said. For example, borrowers who have a relatively high income compared to their balance will likely have a lower payment under a standard-repayment plan.
And even for some borrowers who have a cheaper monthly payment under SAVE, it may not be the best option, she said. For borrowers who can afford it, paying down the loan more quickly could be attractive.
“The name of the game isn’t forgiveness, the name of the game is paying the least amount over time,” she said.
Borrowers can use student-loan calculators on the Department of Education’s website or on Mayotte’s website to determine their monthly low payment under each plan and how much they’ll pay over time.
Some borrowers may already be able to see how much they’ll be expected to pay and their bill due date on their servicer’s website, Mayotte said.
The day a borrower’s student-loan bill is due each month is tied to when they initially left school, said Scott Buchanan, the executive director of the student loan servicing alliance. That date triggers the six month grace period on a student loan, which then sets the bill due date, he said.
Borrowers have always had the option to request a change to their payment due date, Buchanan said. For example it may be convenient for borrowers to move their due date if it falls before the date they typically get paid, he said.
“Generally it’s set when you begin repayment of the loan and continues on that same date unless you make a change request,” he said.
If you have any questions about your options, Buchanan advises reaching out to your servicer early. There have already been moments of much higher than usual call volume, he said, adding that he expects those moments to continue. During those periods, “we have higher hold times and abandon rates,” Buchanan said, referring to the share of calls where a customer hangs up before getting help.
4. If you think an income-driven repayment plan is right for you, apply:
If after reviewing your options, income-driven repayment seems like your best option, you can fill out an application on the Department of Education’s website, on your servicer’s website or by working with your servicer over the phone.
Borrowers who were enrolled in one of the income-driven repayment plans, REPAYE, before the pause will automatically be moved into the SAVE plan. They don’t have to take any action.
5. If you’re still struggling, there is a cushion, but the Biden administration is advising to pay if you can:
For a year after payments resume, borrowers won’t face the worst consequences of missing student-loan payments. As part of this year-long “on ramp” President Joe Biden announced in June, servicers and the Department of Education won’t report borrowers to credit bureaus if they fall behind and borrowers won’t be referred to collections if they default.
Still, the Biden administration is advising borrowers that they should make student-loan payments if they can afford to. James Kvaal, the undersecretary of education, said of the on ramp last month: “It’s not a pause.”
“Our advice to borrowers is, take advantage of whatever benefits are available to them, but you do need to make payments, we recommend you make payments,” he said.
Some borrowers and activists have said they will go on strike to protest the resumption of payments and the student-loan system more broadly. The Debt Collective, a debtors union that is organizing the strike effort and has organized them in the past, is advising borrowers to find a way to strike that is financially safe for them.
For example, the group considers a borrower to be striking if they’re enrolled in an income-driven plan and their income is so low that they qualify for a $0 payment.
“A student-debt strike is about politicizing nonpayment collectively. Instead of doing things as individuals, we are doing them together as a united front,” the organization said.
6. What about all this forgiveness you’re hearing about?
Over the past several months, the Biden administration’s efforts to cancel student debt en masse have grabbed headlines. The Supreme Court struck down officials’ plan to cancel up to $20,000 for a wide swath of borrowers in June. But shortly after the court released its opinion, President Joe Biden vowed to take another stab at debt forgiveness using a different authority.
That “plan B” will take at least several months to play out. Though advocates are pressuring the Biden administration to move as quickly as possible, borrowers will likely start receiving student-loan bills before it’s resolved.
In addition, some borrowers who have been paying their student loans for at least 20 years are starting to see their debt canceled. That forgiveness is part of an effort by the Biden administration to adjust borrowers’ payment counts in situations where they should have been building progress towards forgiveness under income-driven repayment plans.
A lawsuit from two conservative think tanks aimed at stopping the roughly $39 billion in debt cancellation was dismissed by a federal court judge in August. But the plaintiffs have appealed.
Amid all of this news, Abrams of the Student Debt Crisis Center, said the organization is on a “dual track” of trying to inform borrowers “so they don’t get too stuck,” while also continuing to advocate for debt cancellation.
“We always have felt that borrowers should take care of their own situation and then join us in the fight to cancel debt,” she said. “We don’t want to see anyone get hurt in the time it takes to change legislation or regulation.”
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