In about two months, millions of consumers who have borrowed for federal student loans will have to dig a little deeper into their pockets to cover another bill of $150 to $300 a month or maybe even more, depending on what they must.
Where will they find the money?
Often people get into financial trouble because they don’t plan for the unexpected, but chances are many aren’t preparing for what’s to come next year either.
Right now, many consumers should be calculating how they’ll put more money back in 2023 after the payment pause ends on most federal student loans in December. Payments – which have not been demanded for nearly three years – are expected to resume in January.
“We anticipate their budgets are going to be turned upside down with the start of student loan repayments,” said Trent Graham, financial advisory expert for GreenPath Financial Wellness, a Farmington Hills-based nonprofit.
Over the past year, he said, many consumers have found themselves in dire financial straits as they have faced higher costs for everything from gas to groceries to utilities. public and other expenses.
He expects more families to face financial hardship — especially if they’ve borrowed more on credit cards to keep spending — as student loan repayments resume.
For nearly three years, millions of borrowers with federal student loans have had one less bill to pay each month. They have seen repeated extensions granted since the student loan repayment moratorium began in March 2020 as part of pandemic relief efforts.
Much uncertainty over student loan relief
Could another extension of this type take place? Maybe, but it’s not in the cards yet.
The Biden administration announced an ambitious but controversial federal student loan forgiveness program in late August. A simple online application was officially launched on October 17 by the US Department of Education on its StudentAid.gov website.
About 22 million borrowers requested relief in that first week.
But the massive student loan forgiveness program was quickly put on hold after a temporary stay was issued by a federal appeals court on Oct. 21.
Action by U.S. Eighth Circuit Court of Appeals in St. Louis temporarily prevents Department of Education from processing debt relief while court considers challenges brought by attorneys in six states led by Republicans.
Opponents say President Joe Biden lacks the authority to cancel federal student loans because Congress failed to authorize the massive debt relief program. Conservatives say the Biden administration has no reason to invoke the HEROES Act of 2003 to offer blanket forgiveness to such borrowers during a national emergency, such as the pandemic.
Even so, the Department of Education still encourages borrowers to apply for student loan forgiveness online, as the application remains open during the debt suspension. “We encourage you to apply if you are eligible. We will continue to review applications. We will process discharges quickly when we are able to do so and you will not need to reapply,” says the Department of education on its StudentAid.gov website.
Student loan borrowers should still plan to resume repayments in January if the appeals court stay is lifted soon, according to Mark Kantrowitz, a student loan expert who is the author of “How to Appeal for More College Financial Aid”.
“If the court case drags on for a long time, or if the president’s student loan forgiveness plan is permanently blocked by the courts, the president could pursue the payment pause for the duration of his presidency,” Kantrowitz said.
Saving up front might help
No one knows how this will all pan out, but it doesn’t hurt to start putting money aside now to cover monthly federal student loan payments whenever they resume.
The best way to budget is to look closely at how much money is coming in each month and how much is being spent. If you are already spending more than you earn, it is necessary to reduce your expenses and stop relying on credit cards or other loans to make ends meet.
“When you talk about budget, you feel like it’s limiting you,” said Graham, of GreenPath.
Yet when you examine your true financial situation, he says, you allow yourself to live with less stress. If you better understand your limits, you’re less likely to simply take on more debt. GreenPath offers free credit and debt counseling; some other services have fees.
Review repayment options
One option: Federal student loans offer income-based repayment plans that can lower your monthly payments.
Even in light of the uncertain situation ahead, borrowers can still contact their loan manager now to enroll in an income-driven repayment plan, Kantrowitz said. Or they can register when reimbursement restarts.
Borrowers will need to provide information about their income and family size as part of an application for an income-based repayment plan.
“But, if their income is below 150% of the poverty line, they will receive a monthly payment of zero,” Kantrowitz said. And it’s a way to effectively pursue a payment break if they’re on a low income.
Switching to an income-driven repayment plan lowers your monthly payment but lengthens your repayment term from the more traditional 10 years to 20 or 25 years. Interest continues to grow.
The pandemic-related moratorium suspended payments, temporarily applied a 0% interest rate on these loans and halted the collection of defaulted loans.
“The typical student loan payment is a few hundred dollars,” Kantrowitz said.
Where to find an extra $200 a month?
Many people, of course, have not put that money aside in savings for the day the payments become due. Instead, the money could have been used to cover other big bills, including credit card debt.
Options for finding extra money: Cut out the non-essentials. Slow down some spending on things you really can live without. Ask for a raise. Find ways to sell items you don’t use to raise funds. Get extra weekend work. Look for income-driven repayment plan options.
The average amount of outstanding loans under the federal direct lending program is $37,728. If the loans have a 5% interest rate and a 10-year repayment term, Kantrowitz said, the borrower could be looking at a monthly payment of $400.
“Over a 20-year repayment term, that’s $249,” he said. “The payout can be even lower under an income-driven repayment plan.”
Biden’s plan to forgive many federal student loans offers up to $10,000 in student loan forgiveness to many borrowers. Those who had Pell Grants in college could see up to $20,000 in federal student loans forgiven.
For many people, not all of their student loans go away even if the Biden plan is able to keep moving forward.
“Some borrowers might not realize that repayment will resume, or might not think about it until payments resume,” Kantrowitz said.
One of the main concerns about restarting the repayment plan was that up to a third of borrowers could have moved since the payment pause. But Kantrowitz noted that 22 million borrowers provided their current email address and phone number as part of the loan application for debt relief.
Steps to take before payments resume
To prepare for the resumption of payments, suggestions from the Education Department include:
- Review your direct debit registration or register for the first time by logging into your loan officer’s website or contacting your loan officer directly.
- Consult the loan simulator to find a repayment plan that meets your needs and goals or to decide whether or not to consolidate.
The original plan was to try to get student borrowers to apply for federal student loan forgiveness at StudentAid.gov by Nov. 15 to give loan officers time to reduce monthly federal student loan payments to reflect the forgiveness. loan once the payment moratorium ends in January.
If $10,000 of debt is forgiven, Kantrowitz said, one would expect a monthly payment could drop to as low as $100. You could save up to $200 on $20,000 back.
“It will make student loan repayments for those who still owe student loans much more affordable,” Kantrowitz said.
Your payment amount may vary depending on the discount. Also, many borrowers in income-driven repayment plans in many cases would not see lower monthly payments, but would pay off their remaining debt faster, Kantrowitz said.
But again, we don’t know if the loan forgiveness program will continue to be blocked. We also don’t know when the payments would be adjusted. Or really how it will all end up unfolding.
Still, it’s best to plan ahead, which isn’t always easy to do. But it’s a lot less stressful to have an idea of how you’d pay the bill when it comes up.