After approximately 42 months, the student loan payment hiatus is coming to an end. In September, interest on federal loans will start accruing again, and monthly payments will be due starting in October.
Many borrowers may be concerned about fitting the payment back into their monthly budget. Since bills and interest were initially frozen in March 2020 due to a pandemic-relief measure, the cost of living has increased. Additionally, your circumstances may have changed, such as expanding your family, taking on a new mortgage, or losing health insurance coverage.
To assist borrowers with this transition, the Biden administration has provided some flexibility for the first year after payments resume. Here are five important things to know as you start receiving your monthly bills:
1. If you miss a payment, don’t worry.
While it is strongly recommended to make your payments on time, missing a bill or two will not immediately lead to delinquency during the first year of repayment.
The Biden administration has implemented a yearlong “on-ramp” to help borrowers readjust to the repayment routine. If you miss a monthly payment between October 1, 2021, and September 30, 2024, you will not be considered delinquent. Your loan servicer will place any missed payments in forbearance, meaning they will be added to the end of your loan term. They will also continue to accrue interest.
To avoid a large payment at the end of the term, the extra interest on missed payments may be spread out over your ongoing monthly bills. However, if you are enrolled in an income-driven repayment plan and miss a payment, your monthly payment generally won’t increase.
The impact on your credit score is uncertain, but it is unlikely to be as severe as having an account reported as delinquent. Nonetheless, credit scoring companies may take note of certain factors, such as a stagnant student loan balance, which could affect your credit score based on their scoring models.
2. It’s more likely you’ll find an affordable payment plan.
The Biden administration recently introduced the more affordable income-driven repayment plan called SAVE, which adjusts your monthly payment based on your income and family size. The SAVE plan is expected to offer the lowest monthly payment for most borrowers, making it an ideal option for those facing financial difficulties.
The new plan, which replaces the REPAYE plan, is more generous and can reduce payments by more than half once it is fully implemented next summer. It also handles interest differently: if your regular payment does not cover the owed interest, the unpaid interest will be forgiven. This ensures that borrowers who consistently make their payments do not see their balances grow over time.
Other repayment options, such as the standard repayment program that spreads payments over 10 years, should be considered based on your specific circumstances. It is recommended to use the loan simulator tool on StudentAid.gov to determine the most suitable plan.
If you wish to enroll in SAVE or another plan, it is essential to start the process immediately, as it can take up to four weeks to process your application, and payments will begin in October.
3. Borrowers in default can start fresh.
Borrowers who fell into default before the payment pause, which occurs when you are at least 270 days behind on payments, are now considered current on their payments and have the opportunity to enroll in SAVE or any other repayment plan.
However, those who were in default must take specific steps to regain their loan status and complete them before next September to avoid long-term default. They can contact the Education Department’s Default Resolution Group through phone, online, or mail and inquire about the Fresh Start program, which removes the record of default from their credit report. The group can also help enroll them in an income-driven repayment plan, including SAVE.
Once the loans are transferred to a regular loan servicer, the borrower will be placed in an income-driven repayment plan with the lowest eligible payment.
4. Nearly one million borrowers will have their balances canceled.
Approximately 800,000 federal student loan borrowers will not have to make any payments as their remaining balances totaling $39 billion are in the process of being canceled. This initiative by the White House aims to rectify past errors made by loan servicers, such as failure to credit payments or provide accurate advice when borrowers sought assistance.
Many borrowers have already been informed about the cancellation of their balances, and this process will continue until the end of the year. Borrowers who do not yet have enough qualifying payments for cancellation will receive updated payment counts to bring them closer to completing their loan term.
For more details, refer to our guide on this topic.
5. Beware of scams.
All student loan borrowers should be cautious of scam artists who take advantage of those seeking relief or assistance. If you are unsure about the legitimacy of an offer, including relief from the Biden administration, contact your loan servicer using an independently sourced phone number and not any contact details provided in correspondence.