The question on many former students’ minds: “When exactly do federal student loan payments re-start?”. We’re nearing the end of President Biden’s student loan pause, but things get extra complicated because of the pending student loan forgiveness plan.
As with most finance-related things, planning is better than being surprised. Let’s look at a scenario where the student loan forgiveness plan doesn’t pass; what will you do?
- The Student Loan Forgiveness Plan is awaiting Supreme Court approval.
- Various repayment options are available to help you afford your monthly payments, but they do have some caveats.
- Planning for debt repayment is the best thing to do in this situation so you’re not caught up with unexpected costs.
Student Loan Pause Timeline
Most federal student loan payments have been paused since March 2020 in response to the COVID-19 pandemic. In addition to pausing all federal student loan payments, interest and collections against borrowers were also halted.
The most recent extension of forbearance resulted from a legal dispute over President Biden’s student loan forgiveness plan (separate from the current pause). The plan is currently stuck in the Supreme Court awaiting approval.
Federal student loan payments are paused for up to 60 days after either June 30 or the date the Supreme Court decides whether or not to move forward with the forgiveness plan.
If the Supreme Court doesn’t approve the plan, are you ready to repay your federal loans?
Step 1: Housekeeping
Some have chosen to continue making payments during forbearance to take advantage of paying off the principal without incurring interest. If you haven’t been making payments (which is nothing to be ashamed of!), it’s likely been a while since you thought about student loan payments.
That being said, there are a few housekeeping items you’ll want to make sure you take care of before repayment starts.
First, remember who your loan servicer is and how to log in to your account. This is important to check because loan servicers have been changing. You may have gotten an email if your servicer changed, but you can use this site if you need clarification.
Second, take an inventory of what you owe. You can contact your servicer to determine your remaining balance and ensure your payments are heading to the right place.
This is also an excellent opportunity to check your interest rate and ensure you’re on the right repayment plan. If you’re worried you can’t afford it, options are available.
Step 2: Examine Your Repayment Options
The Department of Education offers a variety of repayment plans for federal student loans. Let’s take a look at what each of them entails so you can decide which fits your spending plan the best.
- Standard Repayment Plan: Payments are fixed based on a 10-year repayment plan.
- This type of plan usually pays less over time.
- Graduated Repayment Plan: Payments are lower at first and increase every two years. The gradual increase ensures your loans are paid off within 10 years.
- You may pay more over time than under the standard plan.
- Extended Repayment Plan: Payments are fixed or graduated over a 25-year repayment period. You must have at least $30,000 outstanding loans to qualify for this plan.
- Monthly payments will be lower than under a 10-year Standard or Graduated plan.
- Revised Pay As You Earn Repayment Plan (REPAYE): Monthly payments are 10% of your discretionary income. They are re-calculated every year and based on your family size and updated income.
- You’ll usually pay more over time than under the Standard 10-year repayment plan. But, any outstanding balance left after 20 years (undergraduate) or 25 years (graduate) will be forgiven.
- Pay As You Earn Repayment Plan (PAYE): Monthly payments are 10% of your discretionary income but never exceed what you would pay under the 10-year Standard plan. Payments are recalculated annually based on your income and family size.
- You’ll typically pay more over time than under the 10-year Standard Plan and may have to pay income tax on any forgiven amount.
- Income-Based Repayment Plan (IBR): Monthly payments are 10 or 15% of your discretionary income, but only under the 10-year Standard plan. Any outstanding balance will be forgiven if you haven’t paid off your loan in 20-25 years.
- You may have to pay income tax on any amount forgiven, and you’ll likely pay more over time than the 10-year Standard plan.
- Income-Contingent Repayment Plan (ICR): Your monthly payment will be the lesser of 20% of your discretionary income or the amount you would pay on a repayment plan with a fixed payment over 12 years (adjusted to your income).
- Any outstanding balance will be forgiven after 25 years, but you’ll usually pay more over time than the 10-year Standard plan.
- Income-Sensitive Repayment Plan: Monthly payments are based on your annual income, but your loan will be paid within 15 years.
- You’ll likely pay more over time than under the 10-year Standard plan.
Step 3: Rework Costs Into Your Spending Plan
Now that you know what repayment plan works the best for you and your financial goals, it’s time to work that cost into your monthly spending plan.
At AVID Planning, paying off debt is as important as investing. Paying off your loans quickly will save you money on interest and allow you more room to focus on other financial goals once the debt has been paid.
Use our Purpose-Driven Money System to make your money work for you and your goals.
Where Do You Go From Here?
A Supreme Court decision on the student loan forgiveness plan should be made in June. Until then, planning in case the plan doesn’t pass is the best way to set yourself up for success.
A few other ideas are being tossed around, including extending interest forbearance until September 2023, pushing monthly payments resuming until October 2023, potential loan write-offs for low balances, etc. But none of those things are guaranteed!
Our team at AVID Planning is here to help you pivot your financial plan during times of uncertainty or unexpected costs. Please contact our team today if you need help deciding on your repayment plan, adjusting your financial plan, or have questions about paying off debt in general.