Paying Back Student Loans

More than 4.4 million college students received some sort of college diploma in 2021 — from associate’s to doctorate or professional degrees — but whatever else that can be said about the Class of ‘21, we know this: Nearly 70% soon will have to confront the reality of student loan debt.

Or will they?

President Joe Biden and many members of Congress seem keen on the idea of forgiving student loan debt – somewhere between $10,000 and $50,000 is the hotspot – but student loan forgiveness is a political battlefield, with no certain outcomes. Waiving debt sounds generous, and maybe even the right thing to do. But who gets stuck with the bill?

What this intriguing uncertainty means for freshly minted college graduates: Don’t bet your budget on seeing your student loan balance wiped out. The wisest course is to prepare as though you’re going to have to pay it back, one way or the other.

Student Loan Payments During COVID-19

Passed in March 2020 to combat the economic effects of COVID-19, the $1.9 trillion CARES Act paused payments on federally backed student debt and cut the interest rate to zero. President Biden extended the moratorium on payments and zero-percent interest through May 1, 2022. That means no payment is due until after that. Additionally, interest will not accrue and your credit score will not be harmed if you don’t make payments during the moratorium.

It may sound tempting, if you have extra money in your budget, to take this moment to attack your student debt. After all, every dollar you pay now will go to principal. But there is a better way.

If your loan balance is less than $50,000, don’t even think about making a payment until the political smoke has cleared. Instead, steer your suspended monthly payments into savings. The president and his Democratic colleagues are talking only about wiping out some level of student loan balances. Nobody has mentioned (yet) refunding payments made during the coronavirus-triggered pause.

When the horse trading ends and a relief package is, presumably, signed (sometime the fall), you may be debt free with money in the bank. At worst, you’ll have built up a healthy balance to pay against whatever principal remains.

While you’re at it, be super-skeptical of anyone claiming (s)he can provide student debt relief for a fee. The Consumer Financial Protection Bureau went after California-based Student Loan Pro, alleged to have charged borrowers more than $3.5 million to file paperwork getting them access to debt-relief programs. The catch: Application to those programs (many described below) is free.

Preparing for Student Loans Payments

Under normal circumstances, new graduates have six months before they have to begin making debt payments. That’s half a year to get the lay of the land.

There are several student loan repayment plans to choose from. Some are based on a percentage of discretionary income, run for 20-25 years, and may include loan forgiveness if all payments are made on time. Others start with low payments that increase over time as your income increases.

Regardless of which plan you choose, make sure you know who your loan-holder is, where to send payments, and how much to pay. You may also have questions about discharging your loans or the consequences of missed payments. Get answers to your concerns before you fall behind, and join the 7.5 million borrowers in default when the CARES Act provisions went into effect.

Tips to prepare for student loan payments:

• If you haven’t already — you were busy; we’ve been there — use the grace period (and watch for additional extensions) to research student loan repayment options.
• Create a budget built around your student loans.
• Prioritize paying off student loans.
• Communicate with your loan servicer.
• Set up automatic payments to avoid late fees.
• Avoid student loan default at all costs.
• Know the exact date when you expect to pay off the loan and shoot for that target.

When Do Student Loan Payments Start?

Good news for student loan borrowers. You won’t have to start repaying student loans until the moratorium expires, which is at least September 30, 2021.

For graduating students, there is also something called a grace period that can be anywhere from six months to nine months. This provides a period of adjustment after you graduate, drop out, or slip below half-time status. The grace period is designed to provide a chance to find a job, select a repayment plan, and begin earning an income before you’re swamped with bills.

Are you unemployed? You may be eligible for an unemployment deferment. For federal loans, if you qualify, you could suspend monthly payments for as many as 36 months. However, borrowers must reapply every six months, demonstrating proof of unemployment benefits and an active job search.

For private loans, any variety of deferment is at the discretion of the lender.

The following types of loans have six-month grace periods:

• Direct Subsidized/Unsubsidized Loans (sometimes referred to as Stafford Loans or Direct Stafford Loans)
• Some private student loans

PLUS loans have no grace period, and you must begin repaying them as soon as they are fully disbursed. However, those who receive PLUS loans as a graduate or a professional student get an automatic six-month deferment after graduation, leave school, or dip below half-time enrollment.

Similarly, parents who secure PLUS loans for their child’s education may request a six-month deferment under the circumstances mentioned above.

The grace period on Federal Perkins Loans depends on the school that gave you the loan. If you have this type of loan, check with your school to find out when you must begin repayment.

The grace period on a private student loan depends on the lender and your loan contract. Most private student loans have a short grace period, but you must check with your lender to make sure.

You may also choose to consolidate your student loans during the grace period. This will group your federal student loans into one payment and simplify matters considerably.

If you have federal student loans, you can choose to consolidate them with the Department of Education, through your loan servicer, or consolidate with a private lender.

Avoid hastiness: Borrowers who consolidate early surrender the balance of their grace period; repayment begins when the Direct Consolidation Loan is processed. You may ask to have the processing delayed until nearer the end of your grace period.

Private lenders offer lower interest rates, but only to those with high credit scores. If you have good credit and are looking to lower your interest rates on medical school loans, for example, working with a private lender may be the best option.

How Much Do I Pay Each Month? Can I Pay More?

Your minimum monthly payment is based on the type of loan, the amount you owe, the length of your repayment plan and your interest rate. Typically, borrowers have 10 to 25 years to repay federal loans entirely. Shorter lengths of repayment time or larger loans will result in higher monthly payments.

The Standard 10-year Repayment Plan is by far the most popular plan with borrowers, but that doesn’t mean it is the best plan for you. This is the default plan. Borrowers are automatically enrolled in the Standard Repayment Plan unless they choose a different one.

You’ll make fixed monthly payments for 10 years. It’s a great plan if you can afford the monthly payments and the cheapest option long term because you’ll pay a lot less in interest. If you lack the income to support these payments, however, you should enroll in one of the income-driven repayment plans.

Or perhaps you have in mind applying for the Public Service Loan Forgiveness program. Work full-time in a qualifying field — government at any level, or not-for-profit organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code — and make 120 qualifying monthly payments, and whatever balance remains will be forgiven.

As for making additional payments, you can always pay any amount more than the minimum payment each month. Right now, under zero-interest COVID-19 deferment, your entire payment reduces principal. There are no penalties for early repayment; taking this approach can save you a significant amount in interest over time.

How Do I Make Payments?

Once bills are due — again, only if they are due — you’ll be responsible for sending your monthly payments to the companies that hold your loans.

If you don’t know where to send a payment, check with your school’s financial aid office. The financial aid office will be able to tell you who your loan servicers are. You can then contact your loan servicers directly with specific questions.

You also can retrieve loan information via the National Student Loan Data System. Now more than ever, it’s vital you know your balance details.

Be aware that your payments are due even if you don’t receive the bills. If you move after graduation, or you have relocated during the CARES Act pause, tell your loan servicer your new address to ensure you receive bills and can stay on top of your payments when — if — they resume.

Consider changing your loan due date to make budgeting easier. The monthly payment might be due before you receive your paycheck. Contact your loan servicer to see if your payment date can be switched to a more convenient day.

What Are My Options When I’m Having Trouble Meeting Minimum Loan Payments?

If your monthly required payment is more than your income allows you to pay, you may be eligible for income-driven repayment plans like the Income-Based Repayment Plan (IBR); Income-Contingent Repayment Plan (ICR); or Pay As You Earn (PAYE) or Revised Pay As You Earn (REPAYE).

Income-driven repayment plans are based on your income rather than the amount you owe, thereby lowering payment requirements for low-income borrowers. Generally, these plans account for your income, family size, and state where you live. You pay between 10% and 20% of your discretionary income and plans run 20–25 years, depending on the program.

If you expect your financial difficulty to be short term — maybe you’re between jobs, have seen your income shrink during the pandemic, or are on medical leave — you can temporarily suspend payments on federal student loans. With private lenders, you don’t know until you ask.

However, under normal circumstances, your loans will continue to accrue interest, meaning you will owe more when you resume payments.

You also may be able to extend the time you have to repay federal loans by using an extended repayment plan.

Or, if you expect your earning power to increase significantly over the years, you can opt for a graduated repayment plan. This allows you to pay less at first, with monthly payments increasing over time.

What Are the Consequences of Missed Payments? Defaulting?

Student loans never disappear. There’s no statute of limitations, and student loans are rarely discharged even in bankruptcy — a fact reaffirmed in March by the U.S. Second Circuit Court of Appeals.

With few exceptions — and pending direct relief from Washington — your student loans will follow you until you pay them off.

When payment schedules resume, if there are no changes and you make a late payment on a federal student loan, you may be responsible for a late fee equal to 6% of the payment.

Defaulting on federal student loans results in more severe penalties. Before the CARES Act forbearance, you were considered delinquent when you haven’t made a payment in 90 days. When you haven’t made a payment in 270 days (nine months), you go into default and suffer plenty of consequences for it.

The government can garnish up to 15% of your wages and Social Security benefits, as well as offset income tax refunds. The government may also deduct 25% of each payment for collections fees, making the loan cost significantly more.

Late or missed payments also show up on your credit report and can harm your score.

If you cannot afford your payments, it is much better to contact your loan servicer and review your repayment options rather than simply not paying. Not paying and remaining silent is never a good combination.

Can I Cancel My Student Loans?

Federal student loans may be canceled under the following circumstances:

• Your college closed down while you were a student there or within 90 days after you withdrew.
• Your school owed you or your lender a refund after you withdrew but never provided it.
• The loan was a result of identity theft.
• The student borrower dies.
• You become totally and permanently disabled.

Can My Loans be Forgiven?

Federal student loans may be eligible for certain student loan forgiveness programs.

As described above, if you have an IBR plan, any balance remaining after 10 years will be forgiven if you spend those years in a public service sector such as the military, public education, or police work or work for certain nonprofit 501 (c)(3) organizations.

You can have up to $17,500 in loans forgiven if you teach in a low-income area for five years.

If you ever find yourself struggling with student loans, keep in mind that you always have options. Don’t wait until you’ve missed several payments or have already defaulted on your loans; get help as soon as possible to create a plan that works for you and your budget.

Meanwhile, keep an eye on Washington.