Managing the Return to Student Loan Payments

After 3-1/2 years, last month the pause for federal student loan payments ended, marking the conclusion of the relief measure the government put in place early in the COVID-19 pandemic. Recognizing that many people paying on student loans were workers who may have their pay negatively impacted by the pandemic, the government instituted an initial pause on federal student loan payments that kept getting extended and ultimately lasted until September of 2023. Prior to that, the issue of student loan payments had become a sore spot for many with balances and payments that looked more like mortgages. Because of the length of the pause in payments, it would be easy for payers to forget about the impact of this obligation, but now that the pause has ended, reality may be hitting them squarely in the face. Many people had hope that even if the blanket $10,000 to $20,000 of forgiveness that had been proposed didn’t wipe out their debts, it would at least provide some additional relief, but that proposal was challenged in court and struck down. If you still find yourself subject to having student loans weighing on your mind and your finances, included in this issue of the newsletter are a few tips to help you deal with the return of this most unwanted debt payment.

Face Your Payment Situation Head-On
When you haven’t had to pay a bill in over 3 years, it isn’t surprising that you may have an instinct to forget about what life was like when you had to pay it. Unfortunately, forgetting about paying it and having the bill actually go away are two different things. While it may make you feel better for a little while to bury your head in the sand and not think about your student loan payment, that approach will only lead you into further problems in the future. Rather than taking the “nothing to see here” approach, you should instead make sure all of the administrative things needed are in place to make the best of an unwanted situation. The first step in that process is to contact your loan servicer. An important note is that for some people, your old servicer may not be your current one because some servicers are no longer in the business of servicing federal student loans. You can find out for certain by logging into your account at https://studentaid.gov. When you talk with your servicer, you can find out more than just what your balance and scheduled payment is. You can also determine the status of your loan; for example, if you had your loan in forbearance before the pause, is that still the case? This would also be a good time to ask about your repayment options and whether any other options could provide you with a more affordable payment and/or forgiveness options you may not have been aware of.

Explore Whether Loan Forgiveness is an Option for You
While the aforementioned blanket student loan forgiveness was struck down by the courts, there are other routes to having your federal student loans forgiven, but you may have to do a little work to find out if you qualify for it. The forgiveness program many people have heard about is the Public Service Loan Forgiveness (PSLF) program, which allows people who work in certain fields or service to the public to have their federal student loans forgiven after 10 years of payments. You can read in much more detail about this program in Volume 196 of the Newsletter. The PSLF program has been around for a very long time, but historically, that program did not work as intended, and often disallowed people who met the criteria from having their loans discharged. Over the past year, the U.S. Department of Education has made a concerted effort to ensure anyone who meets the criteria is able to take advantage of this program. Many people who had previously qualified have automatically had their remaining loan balances discharged, and others who are on a path to receiving forgiveness are being recorded in the system to make it easier to complete the process. If you don’t work in a field where you would qualify for PSLF, all forgiveness hope is not lost. The U.S. Department of Education is also currently in the process of implementing what is called the IDR Account Adjustment (IDR is for Income Driven Repayment), which allows past student loan payments that may not have otherwise been counted to now count towards the 20 to 25 year forgiveness provisions that have been part of almost all student loan repayment plans for years. The way this program works is that it takes payments made under one of the other loan repayment plans to be counted even though they were not made under IDR. It even can count periods of deferment and forbearance to count towards the time requirement for loan forgiveness. Under this program, a borrower could have their remaining debt balance discharged if they receive enough credit, or it could move them closer to the time frame required for discharge. If you want to find out if this program might work you, you should contact your loan servicer to explore your options.

Select a Repayment Plan that Works for You
The federal student loan repayment program has long been a source of confusion because there are several repayment plan structures, each with their own requirements and provisions. As with many programs, new repayment plans have been added over time, but the old plans have remained, even if they are not as widely used. Today, the majority of federal student loan borrowers choose to go with some type of IDR plan because they often require a lower monthly payment amount. However, not everyone is aware that there are different IDR plans. Within the past year, a new IDR plan has come onboard called the Saving on a Valuable Education (SAVE) plan, which may significantly reduce the amount of the monthly payment a borrower would have to make. That is the case because of how it calculates the payment requirement, using a larger percentage of the federal poverty guideline to determine your discretionary income and only requiring 5% of that amount rather than the 10% called for in the Revised Pay As You Earn (REPAYE) IDR plan. In addition to potentially lowering your payment amount, another benefit of the SAVE plan is that if your loan payments are not enough to cover the interest on each payment, the remaining interest will not get added to your principal balance like it is with other plans. A couple of considerations for the SAVE plan are that your loan has to be a Direct Loan in good standing, and the reduction in percentage of discretionary income to 5% does not take effect until July of 2024. If you are inclined to choose an IDR plan, or any other plan for that matter, it is worth your while to walk through the options with your loan servicer to see what will be the best fit for you.

Stewardship Emphasis

In a long race, you may pause to catch your breath, but don’t fool yourself into thinking that means you’ve finished the race. Be strategic to get to the finish line successfully.

The Empowerment Channel |Volume CCXIX | Dedicated to Promoting Financial Education through Stewardship