Key Points for Student Loan Payment Resumption
Tens of millions of Americans are about to face a reality check as their federal student loan bills start rolling in again. After a three-year pause, the temporary relief on loan payments and collections has expired, leaving borrowers to resume their monthly payments.
This pause was initially implemented in March 2020 as part of the Trump administration’s efforts to alleviate the financial strain caused by the COVID-19 pandemic. It was extended multiple times under both the Trump and Biden administrations but finally came to an end on October 1 due to a debt-ceiling deal.
While most borrowers will have their first payment due in October, it’s important to note that not everyone will have the same due date. The Department of Education (DOE), which oversees a federal student loan portfolio totaling over $1.6 trillion, will send borrowers a bill at least 21 days before their payment is due, providing them with the payment amount and due date.
For recent graduates, there is a grace period of six to nine months after leaving school before they have to start making payments. However, for the majority of borrowers, their monthly repayment amount will remain the same as before the pause, unless they made optional repayments or changes to their account.
Graduating students attend their graduation commencement at City College in New York on June 3, 2016. (Spencer Platt/Getty Images)
Interest on federal student loans resumed in September after being effectively set to zero in March 2020. Borrowers can expect to pay the same interest rates as before the freeze.
Repayment Plans
Typically, borrowers will repay their loans through income-driven repayment (IDR) plans, where the monthly payment amount is based on their income. Any remaining balance will be discharged at the end of the 20- or 25-year repayment term.
The DOE currently offers four different IDR plans. The newest plan, called Saving on A Valuable Education (SAVE), is replacing the widely used Revised Pay As You Earn plan. The department is also limiting enrollments in older repayment plans.
The SAVE plan offers generous repayment options for undergraduate student loans. However, some critics have expressed concerns that it may turn the loan program into a quasi-grant program.
Under the SAVE plan, borrowers with a discretionary income threshold of 225 percent of the federal poverty guideline will have a monthly payment of $0. Those earning less than $67,500 for a family of four will also have $0 monthly bills.
Starting next summer, most other borrowers on the SAVE plan will see their repayments on undergraduate loans reduced by at least half. Borrowers with both undergraduate and graduate loans will pay a weighted average of 5 to 10 percent of their income based on the original principal balance.
Students who borrowed less than $12,000 will have their remaining balances wiped out after making 10 years of repayments instead of the usual 20 to 25 years.
During the repayment pause, borrowers’ loan balances did not accumulate unpaid interest. For example, if $50 in interest accrued each month and the borrower made a $30 repayment, the remaining $20 would not be charged.
Delaying Payments for a Year
The resumption of repayments will have a significant impact on younger borrowers who exhausted their six-month grace period during the three-year freeze. Many of them may have made financial commitments, such as renting a more expensive apartment or taking on additional debt, assuming they wouldn’t have to worry about student loans for a while.
An analysis by the Consumer Financial Protection Bureau revealed that the median monthly debt obligations for younger student loan borrowers aged 18 to 29 increased by 252 percent, reaching $229 in March 2023.
To address the concerns of borrowers who may struggle to resume repayments, the Biden administration is offering a year-long “on-ramp” repayment period. Borrowers don’t need to enroll or sign up for this program; they will automatically be eligible if they choose not to make payments.
During the on-ramp period, which spans from October 1, 2023, to September 30, 2024, the DOE will not report late or missed payments to debt collection agencies or credit bureaus. Loans will not be placed in default or delinquency.
(Left) Students participate in a demonstration where they pull a mock “ball and chain,” which represents the then-$1.4 trillion student debt, at Washington University in St. Louis on Oct. 9, 2016. (Right) Students walk past a graduation cap and stole at George Washington University in Washington on May 2, 2022. (Paul J. Richards/AFP via Getty Images, Stefani Reynolds/AFP via Getty Images)
However, interest will continue to accrue during this period, so borrowers who don’t make monthly payments to cover the interest will see their overall balance increase.
It’s important to note that missed payments during the on-ramp period will still be due after it expires and will not count toward loan forgiveness under IDR plans or Public Service Loan Forgiveness.
The DOE advises borrowers to continue making payments while waiting for a potential new debt relief program. They emphasize that not making payments can result in increased loan amounts and potential credit score impact.
A New ‘Forgiveness’ Program?
The Biden administration has already discharged $127 billion of student loan debt for nearly 3.6 million Americans. On October 4, the DOE announced an additional $9 billion in student debt discharge, despite strong opposition from Republicans.
The administration is also exploring the possibility of “forgiving” hundreds of billions of dollars of federal student loan debt using the Higher Education Act (HEA). This approach would involve a lengthy process called “negotiated rule-making,” which requires public input and extensive discussions before any changes can be implemented.
The DOE has received over 26,000 public comments on tailoring this relief and will be discussing the initial policies with the newly established Student Loan Relief Committee.
The Student Loan Relief Committee will be discussing the debt relief issue paper during their first meeting on October 10 and 11. The committee consists of non-federal negotiators from various groups, and the public will have an opportunity to provide comments.
The committee will continue to meet in the coming months, and the public will have a chance to submit written comments on the draft rules next year. Final rules on student loan forgiveness are expected to be announced before November 1, 2024.
It’s worth noting that a change in presidency could impact the implementation of these rules, as seen in the past with the reversal of certain regulations. In the meantime, the DOE advises borrowers to continue making payments while they await potential changes to the student loan system.
Republicans have also proposed alternative plans to address student loan debt. The Federal Assistance to Initiate Repayment (FAIR) Act aims to provide relief to those most in need while ensuring a smooth transition back into repayment. It condenses existing IDR plans into one predictable and affordable plan and offers repayment assistance that phases out as borrowers’ incomes increase.
Additionally, Senate Republicans have introduced the Lowering Education Costs and Debt Act, a package of bills aimed at providing better information to students and families before taking out loans and improving transparency about college programs.
As the country’s largest consumer lender, the DOE plays a crucial role in the student loan landscape, surpassing major financial institutions.
Title: Federal Student Loan Payments Resume: What Borrowers Need to Know
Introduction
Tens of millions of Americans will soon face the end of a temporary relief on federal student loan payments and collections. After a three-year pause, borrowers are now required to resume their monthly payments. This article provides an overview of the background, repayment plans, and concerns surrounding the resumption of federal student loan payments.
Background
The temporary pause on federal student loan payments was initially implemented in March 2020 as part of the Trump administration’s efforts to alleviate the financial strain caused by the COVID-19 pandemic. It was later extended multiple times under both the Trump
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