Originally Written by Adam S. Minsky for Forbes.com
Edited for clarity and brevity by Gleba & Associates
Millions of Americans will soon have to resume making student loan payments as the three-year student loan pause comes to an end.
The student loan moratorium has been in effect since March 2020. During that time, federal student loan borrowers have had payments suspended and interest rates set to zero. Borrowers in default on their federal student loans have not had to face collections efforts.
After the Supreme Court ruled last week to strike down Biden’s one-time student loan forgiveness plan, President Biden signed a federal spending bill codifying the end of the student loan pause last month, so the moratorium is coming to an end. The administration has promised several new flexibilities for borrowers to ease transition, but student loan payments are resuming.
Here’s what borrowers should know.
When Student Loan Interest Starts Accruing Again
Most federal student loan borrowers have enjoyed a temporary 0% interest rate since the student loan pause first went into effect in 2020. But that will be ending. “Normal” interest rates will turn back on by September 1st.
Most federal student loan interest rates are set by Congress and are fixed (meaning they don’t change) based on the date of disbursement and are not impacted by market conditions. For most borrowers, interest rates should return to what they were prior to the student loan pause going into effect.
“For most borrowers, unpaid interest will not capitalize during the payment pause and through six months after the payment pause ends,” says Education Department guidance.
When Student Loan Payments Resume
Federal law requires the Education Department and its contracted loan servicers to generate and send billing statements to borrowers, and to provide borrowers with a sufficient window to pay their student loans before the billing due date. While interest will resume in September, student loan payments won’t actually be due until October.
New Biden Student Debt Relief Initiatives To Ease Transition To Repayment
In response to last week’s Supreme Court decision on student loan forgiveness, President Biden announced new initiatives to ease borrowers’ transition into repayment.
Borrowers will have a 12-month “on-ramp” period following the end of the student loan pause. During this time, payment will be due and interest will accrue. But borrowers will not incur late fees, penalties, or negative credit reporting for missing payments. However, unlike the student loan pause period, missed payments will not count toward student loan forgiveness for income-driven repayment or Public Service Loan Forgiveness.
Biden also announced a new student loan repayment plan tied to a borrower’s income, called the Saving on a Valuable Education (SAVE) plan. The plan is effectively an overhaul of the Revised Pay As You Earn (REPAYE) plan, one of the available income-driven repayment options. The SAVE plan will reduce many borrowers’ monthly student loan payments by nearly $100 per month or more, according to the Education Department. Some elements of the SAVE plan are expected to be available by the time student loan payments resume.
Borrowers In Default Have Other Student Debt Relief Options
The Education Department’s new Fresh Start program is now available for borrowers in default on their federal student loans. Fresh Start provides a pathway for defaulted federal student loan borrowers to restore their loans to good standing so that they can access other critical federal student debt relief programs, including potential student loan forgiveness.
Borrowers will have one year after the student loan pause ends to access Fresh Start. During that time, the Education Department will not engage in collections actions against borrowers and will not negatively report defaulted federal student loans to credit bureaus.
Borrowers who get out of default through Fresh Start or another program by the end of this year may be able to receive three years or more of credit toward student loan forgiveness under income-driven repayment plans or Public Service Loan Forgiveness.
What Borrowers Should Do As Student Loan Payments Resume
With student loan payments resuming in only a few months, borrowers should start taking steps now to prepare for repayment.
First, the Education Department recommends verifying who your student loan servicer is. Up to 30 million borrowers may have a different loan servicer than they had in 2020 by the time payments resume, according to a recent report by the Consumer Financial Protection Bureau. Transitions to new loan servicers can be chaotic and disruptive and may lead to confusion and missed payments. Borrowers can verify who their current federal student loan servicer is by logging into their Federal Student Aid account at StudentAid.gov. Make sure to update your contact information.
Borrowers should also evaluate their repayment plan options, and particularly income-driven repayment (IDR) plans. The Education Department is in the early stages of implementing the IDR Account Adjustment, which may get millions of borrowers closer to loan forgiveness, even for those who have not been in IDR. And some elements of the new SAVE plan will be available by the time student loan payments resume, according to the department.
Borrowers can apply for IDR prior to student loan payments resuming. And borrowers who have experienced a reduction in income since their last IDR income recertification can request a recalculation. The Education Department is temporarily allowing borrowers to self-report their income for IDR plans, rather than requiring borrowers to provide supporting documentation, to ease the transition back to repayment.
The Education Department also recommends that borrowers who were on auto-debit prior to the student loan pause re-evaluate their status. “If you were enrolled in auto-debit before the payment pause and you would like to resume when payments resume, you need to confirm your auto-pay enrollment with your student loan servicer if you haven’t already done so,” says the department.
If you have any questions about the current market, or anything else, you can always contact us by giving us a call at (248) 879-4510 or sending an email to info@GlebaAndAssociates.com.