If you have federal student loans, you know payments are due now after being paused since March 2020. This has left many Americans scrambling to figure out how they’ll afford them going forward, or even what their monthly amount is.
Fortunately, if you think your monthly payment is too high, or you simply cannot afford it, there are options available. These include switching to an income-driven repayment plan, and most notably the new SAVE plan.
However, you may have also heard about the Biden administration’s 12-month “on-ramp” period, which gives borrowers a year to get on track with student loan payments without dealing with the worst consequences of default and collection activity. During this time, borrowers who miss monthly payments “are not considered delinquent, reported to credit bureaus, placed in default, or referred to debt collection agencies,” reads a White House fact sheet on student debt relief.
If this on-ramp period feels like a free ticket to skip federal student loan payments for the next 12 months, you should seriously reconsider and instead try to find a way to resume your monthly payments. While many of the consequences of default may be paused for another year thanks to this program, this doesn’t mean you won’t face any consequences at all. And it could be hard to get back on track later.
Why You Shouldn’t Skip Federal Student Loan Payments Right Now
The first thing to note about the federal on-ramp period for student loans is it doesn’t say anything about interest. That’s because interest began accruing on federal student loans in September 2023, and it will continue to accrue even if you take advantage of the on-ramp. This means your student loan balance will continue growing while you’re not making payments.
Not only that, but missing student loan payments does have the potential to impact your credit score even if the loan servicer isn’t reporting the information to the credit bureaus. This is due to your balances showing as increasing on your credit reports if you’re not making loan payments. Skipping them has the potential to ding your credit score in real time, although the impact won’t be as great as if your missed payments were reported as delinquent.
Beyond these downsides of continuing to skip student loan payments, you also have to remember the on-ramp period isn’t forever. Eventually, you are going to have to make payments of some kind unless you qualify for $0 per month with an IDR plan.
And if you can’t afford the monthly payment on your student loans as it stands, applying for the right income-driven repayment plan is almost certainly going to be your best course of action.
Look Into Income-Driven Repayment Plans Instead
The new SAVE plan announced earlier this year has the potential to help you save the most money compared to all other payment plans available for federal student loans. That’s because this plan increases the income exemption for loan payments from 150% to 225% of the federal poverty limit, thus extending eligibility for $0 per month to a lot more people overall. The program will also let people with undergraduate student loans pay just 5% of their discretionary income in loan payments (compared to 10% with other plans) in the future, which the Biden administration claims will lead to savings of at least $1,000 for borrowers who don’t qualify for a $0 monthly payment.
The SAVE plan also leads to complete loan forgiveness of remaining debts in 20 to 25 years. However, borrowers who owe $12,000 or less on their student loans can have their remaining debts forgiven after 120 months (10 years) of payments on the plan. And in instances where someone owes a lower monthly payment than the interest that would accrue, it’s worth noting that unpaid interest does not get added to the loan amount with the SAVE plan.
“The Department of Education will stop charging any monthly interest not covered by the borrower’s payment on the SAVE plan,” reads a White House press release. “As a result, borrowers who pay what they owe on this plan will no longer see their loans grow due to unpaid interest.”
Fortunately, SAVE plan applications are available now, and there’s still time to make the switch and get a $0 monthly payment (if you qualify) or pay less than you’re paying now. Borrowers can sign up by visiting StudentAid.gov/SAVE.
Note: Student loan servicers are struggling to keep up with SAVE plan applications. If you apply, you’ll likely be put in an administrative forbearance for at least a month while your application processes — meaning you’ll also not have to make payments until your plan paperwork is completed.
Your Next Steps
According to consumer protection lawyer Leslie Tayne of Tayne Law Group, borrowers who cannot afford their student loans right now should take steps to figure out their best course of action. These can include reaching out to their loan servicer to inquire about options, but also switching to a new payment plan that makes more sense for how much they earn.
“If you realize that you are struggling with student loan payments, contact your loan servicer as soon as possible,” said Tayne. “They can help you evaluate your options and, ideally, find an income-driven repayment plan that works with your income level and budget.”
Tayne also believes the new SAVE plan is a good option, with the potential to lower monthly payments for borrowers more than any other available option for federal student loans.
Tayne adds all borrowers regardless of status should go to StudentAid.gov to explore resources and access information about repayment choices.
“It’s a good idea to log in to the website, verify that the information in your profile is correct, and confirm a repayment plan,” she said.
Read the full article here