Federal student loan repayment is set to resume in the coming months, with interest starting to accrue in September and payments scheduled to begin in October. After a 3½-year payment pause due to the pandemic, it’s crucial for borrowers to get ready. According to a recent NerdWallet survey, a staggering 88% of federal student loan borrowers did not make payments during the forbearance period. If you’re one of these borrowers, this article provides essential steps to help you prepare for the upcoming repayment phase.
1. Get Familiar with Your Loan Details
The survey revealed that nearly half of federal student loan borrowers (46%) are unaware of their current student loan debt, and 57% don’t know who their loan servicer is. Additionally, close to a third of federal student loan borrowers (31%) are uncertain about their interest rates when forbearance ends, and 27% are unsure about how to make payments.
To find your loan servicer and gain insights into your loan details, log in to the Federal Student Aid website using your FSA ID. If you don’t have one yet, you can create it. On the left side, you’ll see your total balance, and on the right, information about your loan servicer(s). You can make payments on your loan servicer’s website and also find interest rate information. During the payment pause, interest rates may appear as 0%, but you can check the rates on the FSA site by disbursement date(s), as well as see when your loans were disbursed.
2. Choose the Right Payment Plan
While the standard repayment plan spans 10 years and minimizes interest costs if you can afford the payments, there are other options to explore. The survey indicated that 60% of federal student loan borrowers are unaware of the various payment programs available to them.
For many, an income-driven repayment plan may be an excellent choice, as it lowers monthly costs by capping payments as a percentage of your discretionary income and offers forgiveness after 20 or 25 years of payments. The Biden administration is also introducing the SAVE plan, designed to further reduce payments and forgive balances sooner for students with an original loan debt of $12,000 or less. However, be aware that any amount forgiven at the end may be subject to taxation.
3. Assess Your Budget
Nearly 2 in 5 federal student loan borrowers (38%) expect to make significant adjustments to their budgets to accommodate student loan payments once forbearance ends. Review your current budget and identify areas where you can cut back to afford your loan payments. A good starting point is the 50/30/20 budget, which suggests allocating 50% of your income to needs, 30% to wants, and 20% to debt payments and savings.
If cutting back isn’t sufficient, even with an income-driven repayment plan, you might consider postponing payments for up to a year. The Biden administration has implemented a 12-month onramp period, allowing you to delay payments without penalties. However, there are downsides to this approach.
4. Understand the Consequences of Skipping Payments
With the onramp period, you have the option to skip payments on your federal student loans without going into default, preserving your credit score. However, keep in mind that interest will continue to accrue, leading to increased debt by the end of the 12-month period. Additionally, this is only a temporary solution, and after a year, you’ll be required to resume payments or risk default.
While missing payments for a year is a possibility if necessary, if you can find a way to make payments, it’s advisable to do so.
5. Set Up Automatic Payments
For direct federal student loans, setting up automatic payments offers a small interest rate reduction of 0.25 percentage points. While this won’t drastically reduce your loan costs, it can save you some money over time. Moreover, it ensures that you never miss a payment if you have sufficient funds available in your bank account by each due date.