One of the very few good things about 2020 (besides the release of Tiger King, of course) was that federal student loans were put on an interest-free moratorium following the passage of the CARES Act.
The original plan was to resume payments in September of that year, but this did not happen. Instead, we got lucky with a few extensions (six, to be exact).
Now the White House has released a statement saying federal student loan payments should resume after August 31, 2022, though Any suggestions that this might not be the last extension of the year.
If, like me, you have several of these loans under your belt, here’s how to prepare for when payments resume.
Why You Shouldn’t Wait Until September To Act
Dealing with student loans isn’t exactly something everyone likes, but ignoring student loan debt won’t do you any good either. In fact, this is a direct recipe for disaster, as you may miss a payment.
While lenders usually wait 90 days to report late or missed payments to credit bureaus, once they do, your loan is in delinquency. If this happens, your credit score will suffer, making it harder for you to access credit in the future.
Worst part?
Delinquency disappears from your credit report within seven years.
You don’t want a tiny mistake, like a missed student loan payment, to haunt you for years. That’s why it’s so important for all federal student loan borrowers to take control of their loans early and have a student loan repayment plan in place.
More: Why it takes 7 years to build a good credit history
How to prepare for restarting payments
Coming up with the right plan of action for upcoming payments can seem intimidating, but it’s actually easier than you think.
I consulted with Megan Walter, Policy Analyst for the National Association of Student Financial Aid Administrators (NASFAA), and Amy Lynn Richardson, CFP at Schwab Intelligent Portfolios, to develop a process to help you prepare for repayment. starts.
Make sure all your contact information is up to date
You might think it doesn’t matter if your student loan officer has the wrong phone number or your old email address, but it’s important that they can contact you as quickly as possible if they need to.
Why?
Because you don’t want to miss any important updates regarding your student loan accounts, including whether your payment amount has changed or if you have a new due date.
In addition, if you have previously participated in automatic payments, the Office of Federal Student Aid has announced that service personnel will need to contact you to confirm if you wish to continue this agreement. If they are unable to contact you, the automatic debit may be suspended and you may miss your payment.
How to update contact information
You can update your contact information at any time by logging into your StudentAid.gov account and updating your profile information. You can also do this by contacting your student loan provider by phone, email, or by logging into your account with them.
Contact your student loan provider as soon as possible
Many of us are afraid to contact a student loan specialist simply because we are irrationally afraid that it will lead to an unpleasant conversation. But reaching out to your maintenance staff is the key to developing a good repayment strategy.
Here are some things you should learn from your maintenance staff in order to create the perfect plan:
- When payments resume for you. While payments are due to resume after August 31st, each service center handles their due dates differently. So be sure to contact yours to know exactly when your payments are due.
- Your current payment amount. This will help you determine if you are ready to start repaying your loan, or if you need to make any changes to your budget or apply for a different repayment plan.
- If you need to revalidate your income-based repayment plan (if you have already enrolled, of course). Since payments have been suspended for almost two years, you may have missed your recertification date (aka the date you need to provide proof of income by), which could result in an increase in your payments.
NASFAA’s Walter also recommends that every student loan borrower contact their service staff as soon as possible, “as they are likely to be more difficult to contact when repayment starts and more people will be trying to get answers.”
Recalibrate your budget
Without the student loans in the picture (at least temporarily) it’s possible that you’ve slowly but surely compromised some of your income that was originally meant for your loans.
So, to prepare for upcoming payments, Charles Schwab’s Richardson says you need to sit down and tally some numbers and get rid of 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 flows.”
Once you’ve assessed your overall financial situation, Richardson says it’s time to create a budget that includes your 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: What does a real budget look like?
See if your current repayment plan makes sense
If you recently lost your job, make less than before the suspension, got married, had children, or experienced another life-changing event that impacted your finances, it’s time to check if your current repayment plan makes sense.
For this, Walter recommends using StudentAid.gov’s Loan Simulator, which is 100% free.
Loan Simulator uses your actual federal student loan balance, as well as 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 this 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 your payments?
If after making any budget adjustments you can think of, you still can’t afford the monthly bill, here are three options you can explore.
Explore income-based repayment plans
One of the best things about federal student loans over private student loans is that you have access to flexible repayment options, including income-focused 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 be recertified every year 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 earn.
To apply for an income-based repayment plan, you must log into your StudentAid.gov account, complete the form, and send copies of your last two pay stubs or tax returns to Student Loan Services. This last part can usually be done online at your service provider’s website.
More: Income Based Repayment: Should You Do It?
Consider Loan Consolidation
When you consolidate your loans, you are essentially consolidating them into one big loan and (possibly) extending the loan’s repayment period.
The interest rate on this “new” loan will be the weighted average of the interest rates on the loans you wish to consolidate, rounded to the nearest eighth of a percent, and fixed for the life of the loan.
This longer repayment period, along with the weighted average interest rate, is what can significantly reduce your monthly payment.
The best part?
You can also apply for an income-based repayment plan after you consolidate your loans, which can further lower your monthly bill.
However, Walter says consolidation should be approached carefully because:
“Extending the repayment period to 30 years means you will pay more over the life of the loan.”
She also points out that if you have any outstanding interest on your pre-consolidation loans, “that interest now becomes part of the principal of your loan, meaning your interest will now accrue on a higher balance than before.” “.
To apply for consolidation, simply fill out the form here.
More: Student Loan Consolidation and Refinancing Guide
Apply for short-term student loan assistance
If you are just going through a difficult period and anticipate that your financial situation will improve within a month or two, then the best option may be to call your service staff and ask you to put your loans on a short-term deferment or deferment.
Both withholding and deferral allow you to temporarily withhold payments without penalty.
However, there are some disadvantages. One is that interest will continue to accrue (i.e., grow and accumulate) as long as federal student loans are suspended. In addition, it can also affect your student loan forgiveness options. That’s why Walter emphasizes that loan forgiveness should not be used as a long-term repayment strategy, but only as a “temporary measure to keep you from defaulting.”
More: Understanding Student Loan Grace Periods, Deferrals, and Abstentions
Summary
If you forgot your student loans existed when payments were suspended, you are not alone.
The most important thing is to be proactive and look at both your student debt and your current finances to develop a cohesive plan that works for you before payments resume.