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Today, student loan debt in the U.S. totals more than $1.73 trillion, with the average American owing around $39,351. So, whether you’re managing federal or private student loans, you’re definitely not alone.
Thanks to the CARES Act of 2020, many saw monthly payment relief during the COVID-19 crisis. This included a moratorium on both monthly payments and accruing interest for federal borrowers.
But as we start to see a light at the end of the pandemic tunnel, when should you expect to start making payments again? Read on for an overview of how to prepare for federal vs. private student loan payments.
When to Start Paying on Federal Student Loans Again
Federal student loan borrowers have been enjoying a moratorium on their loan payments for the past year. This has helped some borrowers to stay afloat during the coronavirus pandemic, when income and expenses have been unpredictable for many.
That’s because federal loans are covered by the COVID-19 emergency relief directive passed last year. This pause reduced the interest rate on federal loans to 0% as well as halted all payment requirements and collections activity. Borrowers have not been required to make any payments on their federal student loans, nor have they been accruing any new interest charges along the way.
The original COVID relief directive has already been extended once before, with payments set to finally resume in October of this year. However, on August 6, 2021, the Department of Education announced that federal student loans were being given one “final extension.”
With this new directive, student loan repayment, interest, and collection will remain paused until February of next year. So, if you have federal student loans — meaning, those issued by the U.S. Department of Education — you’re not required to pay on your loan(s) again through at least January 31, 2022.
This is excellent news for many borrowers. In fact, according to a recent Pew research study, 67% of borrowers were expecting their newly-resumed loan payments to be a financial hardship. Now, those borrowers have a few more months to plan and budget.
Note: While the Department of Education has extended this moratorium yet again, it was defined as a final extension with a definitive end date. Meaning, don’t plan for it to get extended again. Borrowers should expect payments to resume once the directive expires on January 31; however, this offers them time to financially prepare to start making those student loan payments once again.
How to Prepare
When the COVID relief payment pause is finally lifted, federal student loan borrowers will be expected to resume making regular payments on their educational debt.
Here are some ways you can prepare to make payments once they resume.
1. Consider forbearance options.
Technically, all federal student loan borrowers have been in a period of forbearance since early last year, with no payments required.
Forbearance options are also offered to federal loan borrowers outside of COVID-19. You can also request forbearance if you’re experiencing situations like financial hardship, medical issues, unemployment, or if your minimum loan payments equal 20% or more of your monthly income.
During a non-COVID forbearance period, you’re able to temporarily lower payments or pause them altogether. Just be aware that interest will likely continue to accrue on the loan, and it may take you longer to pay off the debt in the long run.
2. Request an income-based payment.
One of the benefits of federal student loans is that they’re often eligible for income-driven repayment (IDR) plans. And if your income has dropped in the last year and a half, this could be a much-needed path to consider when it comes time to start making payments again.
Income-driven plans allow borrowers to adjust their monthly payment requirement according to their income. There are four different income-based repayment options, depending on the loan(s) you have, but all of them cap your monthly payment at 10% to 20% of your income.
At the end of the plan’s repayment period (which ranges from 20 to 25 years), any remaining loan balance is forgiven. These IDR plans can also be used along with public service loan forgiveness (PSLF) programs, if you qualify.
3. Start budgeting now.
Whether you’ll be making full loan payments again or trying to reduce your monthly obligation, resuming student loan payments will impact your budget. So, it’s important to start planning early.
One easy way to account for this payment ahead of time is to automatically transfer your loan payment amount into a savings account each month. This will help you adjust your available cash flow and get used to budgeting for this payment once again. Plus, you can build up a buffer of savings in the process!
Paying on Private Student Loans Again
If you’re carrying private student loan debt, you most likely know that it doesn’t qualify for the same COVID-19 relief options as federal loan debt. And chances are you’ve been making regular payments on your loans this whole time anyway.
Debt forgiveness programs only apply to federal student loans, so you won’t be able to snag an income-driven repayment plan with private debt. But you still have options to make your debt repayment a bit more manageable for your budget:
1.Refinance your private loans.
By refinancing your private student loan debt, you can possibly lower your interest rate, reduce your monthly payments, get out of debt sooner… Or even do all three!
If you’ve been making on-time payments and have good credit, you may be able to refinance for a notably lower interest rate. By reducing your rate and even extending your loan term, you can also lower your monthly payment to a more manageable amount (if needed).
2. Request forbearance.
Private student loan lenders may offer forbearance options, but the terms and availability will vary. If you’re unable to make your monthly payments, however, it’s better to contact your lender to ask about your options, rather than default on your debt.
Though they’re not federally required to do so, many private lenders have their own COVID-19 relief policies in place right now. So if you’re struggling with monthly payments, it can be worth calling your servicer to see what’s available to you.
Student Loan Debt in Our Country
Loan forgiveness has been a hot topic for many years, and remained a strong talking point during the 2020 election season. Now that the COVID-19 crisis is winding down, will across-the-board loan forgiveness be the next move for our administration? Only time will tell.
Whether you have student loan debt or not, though, forgiveness could still mean big things for the US. For starters, it would allow many borrowers the flexibility to pay off other debt, such as their mortgage or credit card balances, and contribute more toward savings.
(And perhaps, one day in the future, we will simply find ways to make higher education more accessible — and affordable — for all!)