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Borrowers with federal student loans haven't had to make payments for more than three years, thanks to pandemic financial-relief efforts, but that's likely to change soon. Starting in September, payments are expected to resume.
Millions of Americans could face a financial squeeze when that happens. On balance, borrowers appear to be in worse shape overall than before the pandemic. In addition, loan servicing companies could face plenty of problems of their own.
Millions of Americans could face a financial squeeze when that happens. On balance, borrowers appear to be in worse shape overall than before the pandemic. In addition, loan servicing companies could face plenty of problems of their own.
Here are answers to some key questions on what might lie ahead:
Answer: The Biden Administration has not required borrowers to make any loan payments in more than two years, continuing a policy that began under President Trump in response to the Covid-19 outbreak. But that’s likely to end soon.
The recently enacted federal spending/debt ceiling bill included a provision that requires Congress to approve an extension of the payment suspension. Consequently, further delays aren't likely, said Jantz Hoffman, a student-loan repayment expert and chief operating officer at Fosterus.org, a nonprofit group that helps public-service employees and others reduce their education debts.
In short, borrowers should prepare for a resumption in payments starting in September, said Jennifer Edwards. She’s a certified financial planner in Holbrook who provides mentoring for 3rd Decade, a Tucson non-profit group that provides financial-literacy help for moderate-income adults ages 18 to 35, with most in their third decade of life.
The pause is scheduled to end on or around Aug. 30, with interest accruing immediately thereafter.
“As of Aug. 31, the pause ends,” Edwards said. “Interest resumes the next day.”
Answer: In addition to paying more attention to budgeting, if necessary, it might be wise to touch base with your loan servicer, the company handling your billing. While servicers are supposed to notify borrowers about the resumption in payments, Edwards said borrowers should make sure those companies have their correct information on file including current mailing address, email address and name (if that has changed recently).
The federal Consumer Financial Protection Bureau estimates that more than 40% of borrowers will deal with a new and possibly unfamiliar loan servicer when payments resume — a potential source of confusion. Some estimates place the percentage even higher. Many borrowers might not recognize these entities, while the companies might face a crush of customer-service inquiries.
Edwards, who like Hoffman is a Certified Student Loan Professional, said most borrowers she has met through the 3rd Decade program are “glad to know exactly when payments will begin so they can plan accordingly.” Most borrowers have expected to repay their loans, she said, though many also have enjoyed having extra cash during the payment-suspension period.
Answer: Yes. Hoffman expects to see many problems arise when payments restart. “Never have 40-plus million people entered into repayment all at the same time,” he said. ”It’s going to be overwhelming for the servicers.”
Millions of borrowers have had their loans transferred to new servicers. Plus, some borrowers will see higher payments than before because the pause shortened the remaining terms of their loans, he added. In addition, millions of borrowers might need to set up automatic payments again.
“This is going to be a mess, and when payments start the servicers are not likely to be prepared to handle the volume of borrowers asking for help,” Hoffman continued. “I’d suggest all borrowers start working on evaluating their payment plans and setting up auto payments now.”
Answer: Americans have amassed an estimated $1.76 trillion in total student loans, of which federal loans account for $1.64 trillion or 93%, with loans from private lenders making up the rest, according to EducationData.org. Of the 43.8 million people with federal loans — debts borrowed from the government — the average balance is $37,300.
Answer: Most probably are, but the Consumer Financial Protection Bureau expects delinquencies will rise when payments resume. The agency recently estimated that about 8% of borrowers now are behind on credit cards and other loan payments, excluding student debt, up from about 6% at the start of the pandemic.
Answer: Yes, you can change repayment options on federal student loans at any time, for free.
Federal Student Aid, an office of the U.S. Department of Education, discusses various types of repayment plans on its website, which also features a loan simulator where you can explore different options.
For borrowers concerned about their student-loan payments, Edwards suggests they inquire with their servicers about different options. One program that she likes is known as REPAYE. This is an income-driven plan where payments are based on income and family size rather than a borrower's loan balance or interest rate. For some low-income borrowers, payments could be as low as $0 a month while still counting toward required payments, she said.
Answer: While much recent attention was paid to resuming loan payments, another Biden proposal would forgive or cancel up to $10,000 in debt for borrowers generally, or up to $20,000 for those with low-income Pell Grants. Eligibility is available to borrowers with income below $125,000 (individuals) or $250,000 (households).
However, many observers don't think the U.S. Supreme Court will uphold this proposal, which essentially allows the president to discharge debt, Hoffman said. He doesn't see the court ruling in Biden's favor. A decision could come within weeks, if not days.
Answer: No. Forbearance is a temporary halt in making payments that generally doesn’t reduce your loan balance and might stem from financial difficulties or a change in employment.
Forgiveness, by contrast, is the cancellation or discharge of debts. The Biden proposal before the Supreme Court deals with forgiveness.
But partial forgiveness is already possible in other situations, such as for borrowers who work for a government agency or a not-for-profit organization or serve in the military. Debt forgiveness also is a possibility for people who teach in low-income schools. And it could happen for people who attended colleges that close.
The Department of Education recently said it has approved $42 billion in forgiven student-loan debts for 615,000 borrowers since October 2021.
Answer: No. They also won’t be canceled or forgiven merely because the degree isn’t what you expected or if you haven’t landed the job you desired, the Department of Education warns.
Answer: Yes. Doing so will decrease your score, making it harder or more costly to obtain other loans and possibly impairing your ability to access utility services and the like.
“The most important thing you can do to maintain healthy credit is make sure you’re paying your bills on time — student loans are no exception,” reads a blog by TransUnion, a credit-reporting company. “Even one missed payment can lower your credit score, and late payments can stay on your credit report for up to seven years.”
Prior to going into default, delinquent borrowers can make up late payments or possibly receive forbearance to make their loans current again, Hoffman said. However, borrowers who miss payments likely will incur late fees and additional interest.
Answer: The federal government likely will try to recoup its money in various ways, such as by withholding income-tax refunds, garnishing pay or reducing benefits like Social Security payments. You also could lose your eligibility for a student-loan repayment plan, and there are other consequences of delinquencies and defaults. Private lenders, by contrast, are allowed only to sue a borrower in hopes of receiving a court judgment, Hoffman said.
Answer: No. Whether it's problems with a federal or a private student loan, neither situation can lead to jail time, Hoffman said.
Reach the writer at russ.wiles@arizonarepublic.com.
This article originally appeared on Arizona Republic: Here's the latest on when student loan debt repayment will start again
