By Theresa Cagle Fry, Senior Vice President and Manager IRAs, Retirement & Education Planning
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Key Points
- The U.S. Supreme Court struck down the federal student loan forgiveness program
- Payments begin or resume in October; interest begins accruing on balances September 1
- The Department of Education will notify all borrowers of details
- Don’t assume your loan servicer will remain the same
- If you don’t make payments, you risk damaging your credit
In March 2020, federal student loan payments were put on pause. Not only did the COVID-19 pandemic provide a reprieve on payments, but also on interest accrual on the loan itself. In the fall of 2022, a student loan forgiveness program was introduced and then quickly put on hold after millions who sought loan forgiveness were approved. The U.S. Supreme Court subsequently struck down the federal student loan forgiveness program in June 2023, making many student borrowers anxious about their financial situation.
No Federal Student Loan Forgiveness
The debt relief program would have erased up to $20,000 in loans for Pell Grant recipients and up to $10,000 for other federal student loan borrowers who earn less than $125,000. Now that debt relief is off the table, how should you prepare?
Confirm Your Loan Servicer
A lot has happened in the past three years, and you should not assume that your loan servicer is the same as it was before. For example, Navient, one of the largest student loan servicers, got out of the federal student loan business in 2021. Their loans are now being serviced by Aidvantage, a division of a company called Maximus. If your loan servicer has changed, it will mean you will need to register and create an online account with your new loan servicer, re-enroll in auto-pay (if you had that set up before), and get other important information about your loan. Loan servicers are assigned by the Department of Education, so if you are unsure who is currently servicing your federal student loan, you can log in to your federal student aid account using your FSA ID on their website www.studentaid.gov or call 1-800-4-FED-AID.
Reassess Your Budget Before Payments Begin in October
The Department of Education recently clarified that interest accrual will begin on September 1 and student loan payments will begin in October. If you continued to make your student loan payments during the pause over the past three years, those payments have gone toward paying down the principal amount owed on the loans. That will reduce the amount of interest you owe. Borrowers will be notified by the Department of Education beforehand, but information will also be available on the “Federal Student Aid” website, www.studentaid.gov.
It is a good time now to reassess your spending and your budget so any needed adjustments can be made before October. Take a look at how payments will impact the rate at which you are saving, or their impact on current income. By looking at your expenses, your income and your savings, you will have a good idea of where your budget will need to be adjusted to make the student loan payments come October. What you don’t want to do is ignore them. By doing a little planning now, it can help you avoid falling behind on other bills and enable you to continue saving for other important things in your life such as a wedding, a home, or retirement.
What Happens If You Don’t Pay Your Student Loans?
Default is a pretty bad word when it comes to your finances. It’s never a good idea to default on any kind of debt. Doing so creates a vicious cycle of poor credit ratings and higher interest rates when you try to borrow in the future because you are considered a greater risk to the lender. But did you know it can also affect your ability to get a cell phone, insurance, or rent an apartment or house? Credit checks are routinely performed to assess an individual’s financial stability.
Keep in mind there is a difference between delinquency and default. A delinquency is when your loan payments are past due, such as when you miss a payment, or you make your payment after its due date. If your federal student loan payments are 90 days late, they typically will report your delinquency to the major credit bureaus and your credit score will take a hit. However, there have been indications by the Department of Education that they may extend that time period once payments are set to restart in October. Making payments late also means more interest is accruing on the loan. That, in turn, means you’ll end up paying more in the long run.
Defaulting on a federal student loan is even worse. Federal Direct and Federal Family Education Loans (FFELs) are considered defaulted on if a payment is 270 days late. That’s about nine months late. Consequences of defaulting on a federal student loan can include losing eligibility for additional federal student aid, having your tax refunds or other federal benefit payments withheld and applied directly toward repayment of your defaulted loan, having a portion of your paychecks withheld, or even court action.
If you find yourself unable to make payments, contact your loan servicer as soon as possible. They may be able to offer alternate repayment plans that can get you back on track so you can avoid the negative consequences that can impact your credit score for years.
Although the outcome of the federal student loan forgiveness program was not welcomed news for 43 million Americans, there is time to prepare for the changes in your expenses before payments resume in October. By doing some budgeting and planning now, you can test drive your new budget before the first payment is required, which in turn may help to reduce your financial anxiety. Contact your financial advisor today if you need some help developing a budget or a planning strategy to deal with your short-term and long-term financial goals.
Source: Federal Student Aid (https://studentaid.gov); Student Loan Delinquency and Default | Federal Student Aid