After around 42 months, the payment break for the student loan is officially over: interest on federal loans has been accruing again since September and the monthly payments are due this month.
Many borrowers may be worried about squeezing the payment back into their monthly budget. Life is more expensive than it was when bills and interest were initially frozen due to a pandemic relief measure in March 2020. And your circumstances may have changed since then – you may have expanded your family, taken out a new mortgage, or lost health insurance coverage.
To help borrowers make this transition, the Biden administration has provided some leeway for the first year after payments begin. Here are five things you should know when the monthly bills come back:
1. Don’t stress if you miss a payment.
If you can make a payment on time, you should definitely do so. However, if you miss a bill or two, you get some leeway – at least in the first year after repayment begins.
The Biden administration has provided one-year “step-up assistance” to help borrowers get back into the repayment routine. So if you miss a monthly payment from October 1 to September 30, 2024, you will not be considered delinquent. Nor will they be reported as such to the credit reporting agencies, defaulted on payments, or reported to debt collection agencies. Your loan servicer will automatically place all missed payments in forbearance, which in this case means they will be paid until the end of your loan term.
Interest will also continue to accrue on missed payments. However, to avoid a large payment at the end of the term, the additional interest can be added to your ongoing monthly bills to ensure you repay your loan on time. However, if you’re on an income-based repayment plan and miss a payment, your payment generally won’t increase (since payments depend on income and family size).
2. You’re more likely to find a payment plan you can afford.
The Biden administration recently introduced its more affordable SAVE income-driven repayment plan, which ties the size of your monthly payment to your income and family size. The SAVE plan (see our guide here) is expected to generate the lowest monthly payment for most borrowers, meaning it is likely to be the best option for those experiencing financial hardship.
There is much good about the latest plan, which is more generous than previous programs and replaces the REPAYE plan. Once it takes full effect next summer, it will cut payments by more than half.
The plan also handles interest differently: If your regular payment is not enough to cover the interest owed at that time, the unpaid interest will be automatically erased. This means that those who make their payments diligently will not see their balance grow over time, which has happened to many borrowers and discourages them.
In addition to SAVE, there are other repayment options, including the Standard Repayment Program, which spreads payments over 10 years. Because everyone’s circumstances are different, your first stop should be StudentAid.gov’s loan simulator tool, which will help you calculate which plan makes the most sense based on your specific loan details.
If you want to enroll in SAVE or another plan, get started right away – your application may take at least four weeks to process.
3. Defaulting borrowers get a fresh start.
Borrowers who defaulted before the payment pause – which happens when you are at least 270 days behind on your bills – received a fresh start and are considered current on their payments. This means they can sign up for SAVE or another repayment plan.
But those who have defaulted must take certain steps to do so – and complete them before next September – to avoid defaulting on their loans in the long term.
Here’s how: Contact the Department of Education’s Default Resolution Group – by phone, online or by mail – and ask to have your loans taken out of default through the Fresh Start program. The Standard Group can also help you enroll in an income-driven repayment plan, including SAVE.
The group transfers your loans to a regular loan servicer and removes the defaults from your credit report. The servicer will then provide you with an income-based repayment plan with the lowest payment to which you are entitled.
4. Almost a million borrowers will have their credit withdrawn.
About 800,000 federal student loan borrowers will not have to make payments because their remaining balances totaling $39 billion are currently being wiped out. The White House initiative aimed to correct past mistakes made by loan servicers who had failed to extend credit where it was due – or who may have given borrowers poor advice when they called for help.
Many borrowers have already been notified that their balances have been canceled, a process that will continue through the end of the year. After that, borrowers who don’t yet have enough qualifying payments to cancel will receive their updated payment numbers, bringing them closer to the end of the loan term.
For more details, see our guide here.
5. Borrowers, beware.
All student loan borrowers should be aware of scammers who target those seeking help or support.
If you are unsure whether a particular offer – including relief from the Biden administration – is genuine, call your loan servicer at a number you can find independently, rather than in correspondence sent to you.