If nothing changes, the federal government’s payment hiatus for student loan borrowers will end next month.
For the first time since March 2020, when the coronavirus pandemic hit the US and paralyzed the economy, millions of borrowers are back to paying their monthly bills. The typical payment for a government student loan is around $ 400 per month.
For many, the change will be gross. Young workers still have above-average unemployment rates, and even before the public health crisis, around one in four student loan borrowers were in default or default. According to a recent survey for The Pew Charitable Trusts, more than two-thirds of borrowers say they are unwilling to resume their payments.
Still, there are steps you can take to feel better prepared in October, experts say.
When are bills due again?
The payment break is currently expected to end on September 30th. This means that most borrowers will have their first payment due back sometime in October, depending on when they started paying their loans.
Chances are that borrowers will get more time: Recently, US Secretary of Education Miguel Cardona said an extension is being considered.
“It will probably depend on the state of the economic recovery by then,” said university expert Mark Kantrowitz. “I doubt they’ll extend it beyond the end of the year.”
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Don’t expect to have more time, said Betsy Mayotte, president of the Institute of Student Loan Advisors, a nonprofit.
“While it’s still a possibility, it’s not guaranteed,” she said. “It is best to prepare now – the student loan call centers will get busier as we near October.”
What should I do now?
Over the next two months, borrowers should ensure their student loan administrator has their current contact details, Kantrowitz said. For example, if you’ve moved, this may not be the case.
If you were signed up for automatic payments and your bank details have changed, you should also inform your servicer about this.
Setting aside some cash when payments start again can also make the transition less painful, experts say.
What if I can’t afford to pay again?
If you are still unemployed or faced with some other financial hardship due to the pandemic, you have options starting in October.
First, make an application for economic distress or the postponement of unemployment, experts say. These are ideal ways to defer your payments as there is no interest charge.
However, if you don’t qualify for both, you can still put your bills on hold. Keep in mind, however, that as you continue paying, interest rates will go up and your balance will be bigger (sometimes much bigger).
If you expect your struggles to take a while, it may make sense to sign up for an income-based repayment plan. These programs aim to make borrower payments more affordable by capping their monthly bills to a percentage of their disposable income and canceling their remaining debts after 20 or 25 years.
How do I choose the right payment plan?
Many people’s lives have changed as a result of the pandemic.
If your circumstances look different than they did a year ago, it may be useful to review the payment plans available to you and find one that is best for your current situation.
In the meantime, the law has also changed.
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Student loan making is now tax-free until at least 2025, thanks to a provision included in the $ 1.9 trillion federal coronavirus stimulus package that President Joe Biden signed in March. The policy will likely be permanent.
This can make income-oriented repayment plans more attractive, as they often come with lower monthly bills and borrowers are unlikely to face a massive tax burden at the end of their 20- or 25-year payments.
But if you can afford it, the standard repayment schedule is only 10 years.
To work out what your monthly bill would be on different plans, use one of the calculators on Studentaid.gov or Freestudentloanadvice.org, Mayotte said.
If you decide to change your repayment schedule, Mayotte recommends submitting this application to your servicer by early September.
“I have serious concerns that there will be major maintenance delays,” Mayotte said.
Is it still possible to issue student loans?
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Yup!
Biden has asked the US Department of Justice and the US Department of Education to review his legal authority to cancel student debt through executive action. The fact that these reports are pending may explain why we haven’t heard anything more definitive, experts say.
“He will take no steps until this report comes back,” said Kantrowitz.
Even if government officials conclude that Biden does not have such authority, there could still be hope.
While Democrats may find it difficult to pass a student debt forgiveness bill in Congress given their wafer-thin majority, they could enact such a bill as part of the budget reconciliation process this fall. This path would not require Republican support.
Should I consider refinancing my student loans?
Borrowers considering converting their federal student loans into private loans at a lower interest rate may want to wait, Kantrowitz said. For one, most federal student loans have an interest rate of 0% for at least an additional two months.
In addition, “they will feel foolish if they refinance just for the federal government to announce a loan waiver,” said Kantrowitz.
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