Some 43 million borrowers who may have seen their student loan balances dwindle or disappear will now resume their original payments in the fall, following the Supreme Court’s decision to strike down the Joe Biden administration’s plan for debt forgiveness. from students.
Interest on student loans will begin to accrue on September 1, and payments will resume in October, when a three-year pause on federal student loan payments comes to an end, which was implemented due to the COVID-19 pandemic.
The conservative-majority top court ruled that the Biden administration exceeded its authority in attempting to cancel or reduce student loan debt.
The White House plan would have forgiven $10,000 in federal student loan debt for people with incomes less than $125,000 a year or households earning less than $250,000 a year. It would have forgiven an additional $10,000 to people who received Pell Grants to attend college.
Here’s what you need to know to prepare for the resumption of payments:
HOW TO PREPARE FOR THE RESTART OF PAYMENTS?
Betsy Mayotte, president of the Institute of Student Loan Counselors (TISLA), encourages people not to make any payments until the pause has officially ended. Instead, she points out, she put what she would have paid into a savings account.
“So you’ve kept the habit of making the payment, but you’re also earning a little bit of interest,” he said. “There is no reason to send that money to student loans until (it ends) the last minute that 0% interest is awarded.”
Mayotte recommends borrowers use the loan simulation tool on the StudentAid.gov website, or the one found on the TISLA website, to find a repayment plan that best fits their needs. The calculators tell you what your monthly payment would be under each available plan, as well as your long-term costs.
“I really want to emphasize the long term,” Mayotte stated.
Sometimes when borrowers are in a financial bind, they will choose the option with the lowest monthly payment, which can cost more in their loan payment in the long run, Mayotte said. Rather than “set it and forget it,” she encourages borrowers to reevaluate that payment when their financial situation improves.
WHAT IS AN INCOME-BASED PAYMENT PLAN?
An income-based 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.
In general, the amount of your payment under an income-based payment plan is a percentage of your discretionary income. If your income is low enough, your payment could even be $0 per month.
WHAT HAPPENS IF YOU CANNOT PAY?
Hours after the Supreme Court issued its ruling, Biden announced a 12-month grace period to help borrowers who might find themselves in trouble after payments restart. The president said borrowers can and should make payments during the first 12 months after payments resume, but if they don’t, they won’t be at risk of being considered in default and it won’t affect their credit history. But the details of this plan have not yet been disclosed.
If you find yourself in short-term financial straits, according to Mayotte, you may qualify for a deferment or forbearance, which would allow you to temporarily suspend your payments.
To determine if a deferment or forbearance is a good option for you, you can contact your loan provider. One point to note: Interest continues to accrue during deferment or forbearance by the creditor. Both can also have an impact on potential loan forgiveness options. Depending on the terms of your deferment or forbearance, it may be appropriate to continue paying interest during the forbearance.
CAN YOU PAY LESS THAN YOU OWE?
If you sign up for automatic payments, the service provider cuts your interest rate by a quarter of a percentage point, according to Mayotte.
Income-based payment plans are not right for everyone. That said, if you know you’ll eventually qualify for forgiveness under the Public Service Loan Forgiveness program, it’s a good idea to make the lowest monthly payments possible, since the rest of your debt will be forgiven once that you add a decade making payments.
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 reduce it?” Mayotte said.
Split payments in the way that works best for you. You might consider making two installments per month, rather than one large monthly amount.
ARE THE LOANS FORGIVENESS AFTER 10 YEARS?
If you have worked for a government agency or nonprofit organization, the Public Service Loan Forgiveness program offers forgiveness after 10 years of regular payments, and some income-based repayment plans forgive the rest of the debt of a borrower after between 20 and 25 years.
Borrowers should make sure they have signed up for the best income-based repayment plan to qualify for these programs.
Loan applicants who have been defrauded by for-profit colleges may also seek borrower defense and receive debt relief.
These programs will not be affected by the Supreme Court ruling.
CAN THERE BE ANOTHER DEBT FORGIVENESS ATTEMPT?
The Biden administration plans to continue promoting student debt forgiveness with a different legal justification than the one struck down by the Supreme Court. Instead, the White House hopes to provide relief under the Higher Education Act, a sweeping federal law that regulates the student loan program.
The exact determination of who will be eligible and how much will be forgiven will be decided through a federal rule-setting process. But that process can take months, or even longer, so this forgiveness attempt won’t come to fruition quickly.
Biden’s new legal rationale for sweeping debt forgiveness takes the same approach long advanced by Sen. Elizabeth Warren and pro-borrower activists. She uses a clause in the Higher Education Law that allows the Secretary of Education to “assign, release, or discharge” student loans. It’s the same basis the Biden administration used last year to forgive $6 billion in loans for borrowers who were misled by their universities.
TALK TO AN ADVISOR
Fran Gonzales, 27, who lives in Texas, works as a supervisor for a financial institution. She owes $32,000 in public student loans and $40,000 in private student loans. During the lull in her public loan payments, Ella Gonzales said she was able to pay off her credit card debt, buy a new car, and pay off two years’ worth of private loans while saving money. Her private student loan payment has been $500 a month, and her public student loan payment will be $350 a month when she has to make the payments again.
Gonzales recommends that anyone who has received student loans talk to a mentor or financial advisor to learn about the options available to them, and also make sure they are on a repayment plan based on their income.
The Federal Student Aid website can help you connect with counselors, and with organizations like the Center for Student Loan Protection and the Institute for Student Loan Counselors.
Yes, payment plans are always available. However, some activists encourage borrowers to wait a couple more months, since there are no financial penalties for not paying during the payment gap and no interest accrual.
Katherine Welbeck of the Student Borrower Protection Center recommends that you go into your account and make sure you know the name of your servicer, your due date, and whether you are enrolled in the best payment plan based on your income.
Details of the new forgiveness will be negotiated through a federal rule-setting process the government launched Friday. The process, which can take many months, allows the Department of Education to write or modify federal regulations that carry the weight of law.
But there is no guarantee that the plan could survive another legal challenge. The Higher Education Act has been used to forgive student debt, but never to this magnitude. Education lawyers for the Trump administration concluded in 2021 that the education secretary “lacks the statutory authority to provide mass forgiveness” under the law.
