A three-year hiatus on federal student loan payments will soon end, regardless of how the Supreme Court rules this week on a White House plan to forgive billions of dollars in student loan debt.
The top conservative-leaning judicial forum appears poised to strike down President Joe Biden’s plan, which would erase $10,000 in federal student loan debt for those with incomes less than $125,000 a year or families earning less than $250,000. He also wants to pay off an additional $10,000 for those who received federal Pell Grants to attend college.
Payments that were halted due to COVID-19 will resume in the fall no matter what, but an estimated 43 million borrowers could see their balances reduced or erased entirely if the court decides the plan can go ahead.
Interest on student loans will begin to accrue on September 1, and payments will resume in October.
Here’s what you need to know to prepare to start repaying your loans:
HOW SHOULD I PREPARE FOR THE RESTART OF STUDENT LOAN PAYMENTS?
Betsy Mayotte, president of the Institute of Student Loan Counselors, encourages people not to make any payments until the hiatus ends. In her place, she says, put what she would have paid into a savings account.
“So you’ve kept in the habit of making the payment, but you’re also earning a little bit of interest,” he said. “There’s no reason to send that money to student loans until the last minute of the 0% interest rate.”
Mayotte recommends borrowers use the loan simulation tool at StudentAid.gov or the one on the TISLA website to find the repayment plan that best suits their needs. The calculators tell you what your monthly payment would be with each available plan, as well as your long-term costs.
“I really want to emphasize the long term,” Mayotte said.
Sometimes when borrowers are financially strapped, they choose the option with the lowest monthly payment, which may cost more over the life of the loan, Mayotte said. Rather than “set it and forget it,” it encourages borrowers to reassess when their financial situation improves.
WHAT IS AN INCOME DRIVEN PAYMENT PLAN?
An income-driven repayment plan sets your monthly student loan payment at an amount that is intended to be affordable based on your income and family size. You factor different expenses into your budget, and most federal student loans are eligible for at least one of these types of plans.
Generally, your payment amount under an income-driven repayment plan is a percentage of your discretionary income. If your income is low enough, your payment could be as low as $0 per month.
If you want to repay your federal student loans under an income-driven plan, the first step is to complete an application through the Federal Student Aid website.
TALK TO AN ADVISOR
Fran Gonzales, 27, based in Texas, works as a supervisor at a financial institution. He has $32,000 in public student loans and $40,000 in private student loans. During his public loan payment hiatus, Gonzales said he was able to pay off his credit card debt, buy a new car and pay off two years of private loans while saving money. His private student loan payment has been $500 per month, and his public student loan payment will be $350 per month when he restarts.
Gonzales recommends that anyone with student loans talk to a mentor or financial advisor to learn about their options, as well as to make sure they’re on a repayment plan based on income.
The Federal Student Aid website can help you direct yourself to counselors, as well as organizations like the Center for Student Loan Protection and the Institute for Student Loan Counselors.
“I was the first in my family to go to college, and I could have saved money with grants and scholarships if I had known someone who knew about college,” she said. “I could have gone to community college or lived in cheaper housing… It’s a big financial decision.”
Gonzales received her degree in business marketing and says she was “horrible with finances” until she started working as a loan officer herself.
Gonzales’s mother works in retail and her father works at the airport, she said, and both encouraged her to pursue higher education. For her part, Gonzales now tries to inform others with student loans about what they are taking on and what her options are.
“Any young person I come across, I try to educate them.”
CAN I SET UP A PAYMENT PLAN FOR MY STUDENT LOANS?
Yes, paid plans are always available. Still, some advocates encourage borrowers to hold off for now, since there is no financial penalty for non-payment during the break in payments and interest accrual.
Katherine Welbeck of the Student Borrower Protection Center recommends logging into your account and making sure you know the name of your servicer, your expiration date, and whether you’re enrolled in the best payment plan defined by income.
WHAT IF I CAN’T PAY?
If your budget doesn’t allow you to resume payments, it’s important to know how to navigate the possibility of default and delinquency on a student loan. Both can hurt your credit rating, making you ineligible for extra help.
If you find yourself in a short-term financial bind, according to Mayotte, you may qualify for deferment or forbearance, which allows you to temporarily suspend payment.
To determine if a deferment or forbearance is a good option for you, you can contact your loan servicer. One thing to note: Interest still accrues during the deferment or forbearance. Both can also affect potential loan forgiveness options. Depending on the terms of your deferment or forbearance, it may make sense to continue paying interest during the suspension of payments.
HOW CAN I REDUCE MY COSTS IN PAYING MY STUDENT LOANS?
— If you sign up for automatic payments, the servicer takes a quarter percent off your interest rate, according to Mayotte.
— Payment plans based on income are not right for everyone. That said, if you know you’ll eventually qualify for forgiveness under the Public Service Loan Forgiveness program, it makes sense to make the lowest monthly payments possible, since the rest of your debt will be paid off once that decade of payments is complete. .
— Reassess your monthly student loan payment during tax season, when you already have all your financial information in front of you. “Can you afford to increase it? Or do you need to decrease it?” Mayotte said.
— Split payments the way that works best for you. You might consider two installments per month, instead of one large monthly sum.
ARE STUDENT LOANS FORGIVENESS AFTER 10 YEARS?
If you’ve worked for a government agency or nonprofit organization, the Public Service Loan Forgiveness program offers cancellation after 10 years of regular payments, and some income-based repayment plans cancel the rest of the debt of the borrower after 20 to 25 years.
Borrowers must ensure they are enrolled in the best income-based repayment plan possible to qualify for these programs.
Borrowers who have been defrauded by for-profit colleges can also apply for borrower defense and receive relief.
These programs will not be affected by the Supreme Court ruling.
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