Already emails are popping up for borrowers with federal student loans, the first round of alerts from the U.S. Department of Education that payments will once again be due in October.
After a pandemic-related pause stretched out for more than three years, borrowers with federal student loans under the direct loan program need to prepare to restart making student loan payments — $300 or $400 a month in some cases — in October. Since 2010, all federal student loans have been made under the direct loan program.
Ignoring things for just a while longer isn’t the smart thing to do here. The best bet: Research your options. Figure out how you’ll make those payments. Or review federal income-driven repayment plans, like the new SAVE program, to help you cut those monthly payments for now.
Just a year ago in August, borrowers had plenty of hope that they’d be eligible for a one-time forgiveness program that was being rolled out by President Joe Biden. Under that plan, individuals would have seen up to $10,000 in federal student loans — or up to $20,000 for those who had Pell Grants in college — simply go away.
Not anymore.
On June 30, the U.S. Supreme Court put a stop to the president’s plan. A 6-3 majority ruled that the Biden administration overstepped its power by attempting to forgive more than $400 billion in student loans left lingering during the pandemic.
The payment pause, which began in March 2020, temporarily froze most federal student debt with a 0% interest rate. After repeated extensions, the pause — which was initially only to last three months — remained in place through much of 2023.
By not having to make payments, many borrowers had access to more money in their budgets and, ultimately, in some cases an extra $14,000 or $15,000 over the entire stretch of the pause.
If you’re making very little money now, you want to figure out more affordable options, including possibly considering a new federal program called SAVE that’s designed to help borrowers reduce their payments to a more manageable level.
What should student loan borrowers do now?
To prepare for repayment, update your contact information with your loan servicer and on StudentAid.gov to make certain that you’ll get your bill and know when to make your payments.
Review any emails you might have already received in late July or so from the Department of Education. The initial email can tell you who your servicer is at this point, as well as your servicer’s website.
The email sent to college borrowers by the U.S. Department of Education referred to a Preparing for Payments to Resume page on that site for borrowers to review options and resources before October.
Borrowers are going to get their bill, with their payment amount and due date, at least 21 days before the money must be paid. Start looking for those bills shortly after Labor Day.
The odds are good that your student loan servicer may have changed since the payment pause began more than three years ago. It’s estimated that 44% of borrowers have a new student loan servicer since before the COVID-19 pandemic, according to Mark Kantrowitz, a student loan expert who is the author of “How to Appeal for More College Financial Aid.”
Kantrowitz said it’s important to update your contact information with StudentAid.gov to get all the notices and alerts that will be sent in the weeks ahead. The law, he said, requires six notices be sent in the 60 days prior to the restart of repayment.
According to the Education Department, the monthly bill that you receive in September will contain your payment amount. But it’s also possible that you’ll receive a communication called a “disclosure” from your servicer in August that will give you a number for what you’ll owe each month.
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To get current loan balances, go to the Federal Student Aid website StudentAid.gov and enter your ID and password to see your balance, payment status, current loan servicer, and interest accrued on all of your federal student loans.
Sign up for autopay for student loan bills
Many borrowers would be wise to have their student loan payments automatically paid each month out of their checking account directly to the loan servicer.
“Not only will this help you avoid the chaos and confusion surrounding the restart of repayment, but you’ll get a 0.25% percentage point interest rate reduction as an incentive,” Kantrowitz said.
If you were previously signed up for autopay, you’d likely need to reenroll after the long payment pause. You’d sign up for autopay on your servicer’s website.
If you’re using autopay, you’d want your bank account to have enough money in it to cover the bill by the due date.
What if I can’t afford to make monthly payments?
A new Saving on a Valuable Education program began a soft launch July 31. The official launch is expected later in August.
The SAVE plan can help borrowers reduce their monthly payments, limit how much interest will build and ultimately reduce the amount that would be paid back over one’s lifetime.
What’s being called the SAVE plan replaces the existing Revised Pay As You Earn or the REPAYE Plan. Borrowers on the REPAYE Plan will automatically be put on the SAVE Plan.
More than 1 million additional low-income borrowers will qualify for a $0 monthly payment under the SAVE plan, including 400,000 already enrolled on the REPAYE plan, according to the Education Department.
Others can qualify for relatively small monthly payments. For example, an estimated monthly payment could be $143 a month for someone without children who is making $50,000 a year.
Someone wouldn’t need to make payments on federal student loans if they’re signed up to be part of this plan and are a single borrower earning $32,800 or less, which is roughly $15 an hour for someone working full time.
The monthly payment would be $0 for a family of four earning $67,500 or less (threshold amounts are higher in Alaska and Hawaii). “Borrowers earning more than these amounts will save at least $1,000 per year, compared to the current income-driven repayment plans,” according to the U.S. Department of Education.
Under the SAVE plan, monthly payments for undergraduate loans essentially will be cut in half compared with earlier income-driven repayment plans. Borrowers have to pay just 5% of their discretionary income toward student loans, rather than 10%.
It’s essential for you to make the payments that are required under this plan. If you make your monthly payment, the Education Department notes, your loan balance won’t keep growing due to unpaid interest. After making at least 10 years of payments, some borrowers could see their remaining debt canceled down the line.
“Borrowers with original principal balances of $12,000 or less will receive forgiveness of any remaining balance after making 10 years of payments,” according to the Department of Education. The maximum repayment period before forgiveness rises by one year for every additional $1,000 borrowed. So it could take 12 years until you see loan forgiveness if your original principal balance was $14,000.
Your monthly payment amount is based on your discretionary income. That’s defined as the difference between your adjusted gross income and 225% of the U.S. Department of Health and Human Services Poverty Guideline amount for your family size. The old threshold was 150%.
The U.S. Department of Education noted online that it has begun a beta version to accept applications now to refine the process ahead of the official launch. See Studentaid.gov/idr for more information about signing up. A “Loan Simulator” at the site can help you select the right income-driven repayment plan.
If you’re not making much money, an income-driven repayment plan can adjust your monthly payment to reflect your income and family size. Apply with the Education Department soon if you’d like a lower monthly payment before your first bill hits.
If you have private student loans, it’s important to know that student loan lenders typically don’t offer income-driven plans, but they might offer alternative repayment plans on a case-by-case basis.
Don’t wait until October to figure out what’s next
A lot likely happened in your life since 2020. Maybe, you bought a home, moved across country, started a family, took on a car loan to buy a new or used car, went into another field of work. And maybe you’re dealing with a lot more debt as a result of some of those changes.
Someone who is burdened by student debt could very well face challenges making payments on credit card debt, personal loans and car payments as well, said Tayri Martinez-Orza, a quality assurance specialist at GreenPath Financial Wellness, a nationwide nonprofit financial counseling and education service based in Farmington Hills.
As borrowers are increasingly aware that their student loan payments will resume in October, she said, more are calling GreenPath for advice. Some callers want to know more about how to pick the right income-driven repayment plan; others want to review their options for dealing with their debt overall.
GreenPath has seen a 55% increase in call volume since this same time last year, she said. All those calls don’t deal with student loans; many are dealing with the burdens of high rate credit cards.
The average credit card rate has soared to 20.53%, up from 17.42% a year ago, following the Federal Reserve’s rate hike on July 26, according to the latest data from Bankrate.com.
The average student loan balance was $55,254 among GreenPath clients who enrolled in a debt management plan in May. The median — the midpoint where half owed more and half owed less — was $32,874.
Many college grads and borrowers who have college debt but no degree borrowed more money on credit cards, took out car loans and tapped into personal loans during the student loan payment pause that began at the start of the COVID-19 pandemic.
Now, Martinez-Orza said, it’s tougher to find a few hundred dollars or more a month in a budget to pay a student loan bill. Among GreenPath’s clients in May who were dealing with debt, only 27% had extra of $100 or less each month. Another 26% didn’t have any such surplus.
“Once that payment is due, that payment may not be feasible for a lot of people,” she said. GreenPath offers free student loan counseling at 855-783-1410 to review repayment options and examine the pros and cons of various income-driven repayment plans.
About 65% of student loan borrowers who took advantage of the payment pause said they have no idea how they’re going to restart making those payments in the fall, according to an online survey done in May by Big Valley for Fidelity Investments. The survey involved 2,004 respondents.
According to the survey, 67% of recent graduates with student loan debt said their student loan debt is preventing them from participating in major life milestones like saving for retirement, getting married or buying a home.
On a somewhat humorous level, the Fidelity “College Savings & Student Debt Study” noted that more than 4 in 10 surveyed would “rather clean the communal dorm shower than have their credit card statement read out loud to their entire class.”
In some cases, student loan borrowers used the payment pause as an opportunity to address other concerns.
“We estimate that the student debt payment pause immediately increased consumption, as borrowers used the new liquidity to increase borrowing on credit cards, mortgages, and auto loans rather than avoid delinquencies,” according to a working paper published in the National Bureau of Economic Research.
The payment pause led to a sharp drop in federal student loan payments — even though borrowers could have continued to pay — and an increase in credit scores, according to the study conducted by researchers out of the University of Chicago.
Outstanding student loan debt hit $1.57 trillion in the second quarter, according to The Federal Reserve Bank of New York’s Center for Microeconomic Data report issued in August. Mortgage balances hit $12.01 trillion, with auto loan balances coming in second at $1.58 trillion. Credit card debt ranked fourth at $1.03 billion.
Less than 1% of aggregate student debt was 90-plus days delinquent or in default in the second quarter, according to the Fed data, which was a small decline from the previous quarter. Reported delinquencies remain at historic lows. The payment pause — and the fact that missed payments on federal student loans will not be reported to credit bureaus until the fourth quarter in 2024 — both benefited borrowers.
Yet, some concerns are growing, especially after credit card balances grew at a fast clip in the second quarter.
“About one-in-five student loan borrowers have risk factors that suggest they could struggle when scheduled payments resume,” according to a Consumer Financial Protection Bureau blog published in June.
“Student loan borrowers who are already having difficulty with their other payment obligations are especially likely to struggle with their student loan payments if they don’t get some sort of payment relief like enrolling in an (income-drive repayment) plan,” the blog noted.
Who won’t have to start paying on their student loans?
Not everyone needs to worry come October. Borrowers who are still in school still won’t have to start repayments. Borrowers who graduated in May or June won’t have to make payments until November or December, when the six-month grace period for new graduates ends.
And remember, not everyone was going to benefit from the federal student loan forgiveness package, as proposed last year. Borrowers would not have received loan forgiveness if their annual income during the pandemic was $125,000 or higher for individuals and $250,000 or higher for married couples.
For some borrowers, it’s wise to check to see whether you qualify for any targeted loan forgiveness. More than 2 million borrowers have been granted forgiveness in the last two years due to public service employment, disability, or college wrongdoing, according to the Education Department’s initial email to borrowers.
Some legal challenges have cropped up regarding specific forgiveness plans, including one involving a plan to forgive some $39 billion in federal student loan debt for some 804,000 borrowers. This plan involved a one-time fix to correct previous errors involving those who made income-driven repayment plans for years. Some borrowers who signed up for those plans faced difficulty getting credit for all of the payments they have made. So some confusion continues.
Watch out for quick-fix student loan scams
Student loan forgiveness scams are lurking in the wings — and could increase as we get closer to October.
A Genesee County borrower made monthly payments to a scammer who claimed to be from a debt consolidation company. But not a dime went toward that actual loan, according to an alert by the Better Business Bureau Serving Eastern Michigan.
The student debt scam can start out with an email, letter, or phone call from someone claiming you are eligible for “student loan consolidation,” “payment reduction program,” or a similar service. Some scammers are even impersonating the Federal Student Aid department and claiming the new benefit allegedly is part of “the new 2023 guidelines.”
The scammer wants you to hand over your Social Security number, name, address and even your log-in information for StudentAid.gov. Don’t do it.
The Department of Education or your student loan servicer will never ask for your FSA ID or password, according to an alert by the Consumer Financial Protection Bureau.
A key tip from the CFPB: “Scammers sometimes unlawfully get personal information about you from your credit report. So even if a company claims to know your student loan balance or other details about your loans, they still may not be legitimate.”
Avoid pitches with false promises. The Federal Student Aid site noted some of these false claims:
- “You are now eligible to receive benefits from a recent law that has passed regarding federal student loans, including total forgiveness in some circumstances. Federal student loan programs may change. Please call within 30 days of receiving this notice.”
- “Your student loans may qualify for complete discharge. Enrollments are first come, first served.”
In another version of a student loan scam, you might be asked to make a small upfront payment to get the ball rolling on student loan forgiveness. But no real government student loan program requires an advance processing fee. You do not have to pay a fee — or hand over your credit card number — to get help with an income-driven repayment plan.
Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on Twitter @tompor.
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