One of the few good things in 2020 (besides the release King of tigers, Certainly) was when federal student loans were enacted with an interest-free moratorium following the approval of the CARES Act.
The original plan called for payments to resume in September 2020 … but that didn’t happen. Instead, we got lucky with a few extensions.
Now – after almost two years of blissful moratorium – the time has come. Student loan payments will resume after January 31, 2022.
If you’ve avoided your federal loans so far, that means it’s time to get ready for what’s to come.
Why should you act now
Dealing with student loans isn’t something everyone likes, but ignoring your student loan debt won’t do you any good either. In fact, this is basically a recipe for disaster as you might miss out on a payment.
Although lenders usually wait 90 days to report late or missed payments to the credit bureaus, once they do, your loan becomes overdue. If this happens, your credit rating will suffer, making it difficult for you to access credit in the future.
The worst part?
It takes up to seven years for arrears to disappear from your credit report.
You don’t want a tiny mistake like a missed student loan payment to haunt you for years. This is why it is so important for all federal student loan borrowers to take control of their loans early and come up with a student loan repayment plan.
More details: Why It Takes 7 Years to Build a Good Credit History
How to prepare for a payment restart
Coming up with the right game plan for upcoming payments may sound daunting, but it’s actually easier than you think.
I consulted with Megan Walter, Policy Analyst for the National Student Financial Aid Administrators Association (NASFAA), and Amy Lynn Richardson, Senior Manager and Financial Planner of the Central Planning Team at Charles Schwab, to develop a course of action to help you (and I) be prepared for when the redemption starts.
Make sure all your contact information is up to date
You might think it doesn’t really matter if your student loan officer has the wrong phone number or your old email address, but it’s very important that they can reach you as quickly as possible if they need it.
Why?
Because you don’t want to miss out on any important updates regarding your student loan accounts, including whether your payment amount has changed or you have a new due date.
In addition, if you were previously enrolled in the automatic payment system, the Federal Student Aid office announced that service staff will need to contact you to confirm if you want to continue using this agreement. If they are unable to contact you, automatic charges may be suspended, which could result in a missing payment.
How to update your contact information
You can update your contact information at any time by logging into your StudentAid.gov account and changing your profile information. You can also do this by contacting your Student Loan Service Specialist by phone, email, or by logging into your account using them.
Contact a Student Loan Service Specialist ASAP
Many of us are afraid to contact our student loan service simply because we irrationally fear that it will lead to unpleasant convoys. But reaching out to your service agent is key to developing a good repayment strategy.
Here are some things you should ask the maintenance staff to get the perfect plan:
- When payments resume for you. While payments are due to resume after January 31, 2022, each service staff handles their deadlines differently. Therefore, be sure to contact yours to find out exactly when your payments will be due.
- Your current payment amount. This will help you determine if you are ready to start repaying your loans or if you need to make any changes to your budget or apply for a different repayment plan.
- If you need to re-confirm your income-driven repayment plan (assuming you’ve already been credited, of course). Since payments have been suspended for almost two years, you may have missed the recertification date (that is, the date by which you need to submit proof of income), which could lead to an increase in your payments.
NASFAA’s Walter also recommends that every student loan borrower contact their service agent as soon as possible, “as they are likely to be more difficult to obtain when repayment begins and more people are struggling to get answers.”
Recalibrate your budget
Without student loans (at least temporarily), it is possible that you have slowly but surely compromised a portion of your income that was originally earmarked for your loans.
So, to get ready for upcoming payments, Charles Schwab’s Richardson says you need to sit down and figure out some numbers and cut out unnecessary expenses if necessary.
“Take this opportunity to understand your entire financial situation, not just your student loans. I can’t answer questions about student loans without understanding the big picture of our finances, including goals, other debts and cash flow. “
After assessing your overall financial situation, Richardson says it’s time to create a budget that includes loan payments and try to stick to it as much as possible.
“In this case, creating a plan can reduce the stress and anxiety associated with managing any kind of debt.”
More details: What does a realistic budget look like?
See if your current repayment plan makes sense
If you’ve recently lost your job, earned less than before the discontinued payments, got married, had children, or had another life-changing event that changed your finances, it’s time to check if your current payment plan makes sense.
To do this, Walter recommends using StudentAid.gov’s loan simulator, which is 100% free.
The Loan Simulator uses your actual federal student loan balance along with your income, family size, and state of residence, among other details, to help you determine which repayment plan best suits your financial needs.
Walter also says that using the tool “can help students decide if consolidating their student loans is a good choice, depending on their situation.”
What if you still can’t afford payments?
If, after making any budget adjustments, you still can’t afford a monthly bill, here are three options you can explore.
Explore income-driven repayment plans
One of the best things about having federal student loans instead of private student loans is that you have access to flexible repayment options, including income-driven repayment plans.
Income-based repayment plans are designed to make your debt more manageable by adjusting your monthly payment as a percentage of your income.
On the other hand, these plans must recertify annually in order for you to remain eligible, but the good news is that your loan payments can be as low as $ 0, depending on how much you make.
To apply for an income based repayment plan, you must log into your StudentAid.gov account, complete a form, and submit copies of the last two payroll receipts or tax returns. your student loan. This last part can usually be done online at your service staff website.
More details: Income Based Payout: Is It Worth It?
Consider Loan Consolidation
When you combine your loans, you are essentially consolidating them into one big loan and (possibly) extending the maturity of the loan.
The interest rate on this “new” loan will be the weighted average interest rate of the loans you want to consolidate, rounded to the nearest one-eighth of a percent, and will be fixed for the life of the loan.
This longer maturity, coupled with the weighted average interest rate, is what can significantly lower your monthly payment.
The best part?
You can also apply for an income-driven repayment plan after you consolidate your loans, which can further lower your monthly bill.
Anyway, Walter says that you should be careful about consolidation because:
“Extending the repayment period to 30 years means that you will pay more over the term of the loan.”
She also notes that if you have outstanding interest on your loans before consolidation, “that interest now becomes part of the principal of your outstanding loans, which means that your interest will now accumulate on a higher balance sheet than before.”
To apply for amalgamation, simply fill out the form here.
More details: Student Loan Consolidation and Refinancing Guide
Apply for a short term student loan
If you are just going through a difficult period and anticipate that your financial situation will improve within a month or two, then your best option may be to call your service staff and ask them to transfer your loans for a short term or grace period.
Both deferral and deferral allow you to temporarily suspend payments without incurring any penalties.
However, there are also disadvantages. One is that interest will continue to rise (in other words, rise and accumulate) while federal student loans are suspended. Also, it can affect your education loan forgiveness options. This is why Walter emphasizes that loan forgiveness should not be used as a long-term repayment strategy, but only as “time frames to keep you from defaulting.”
More details: Understanding grace periods, deferrals and withholdings from a student loan
Summary
If you completely forgot about the existence of your student loans while payments were on hold, you are not alone. However, the time has come: …
The most important thing is to take the initiative and look at both your student debt and your current finances to come up with a holistic plan that works for you.