Federal student loan borrowers need to plan ahead if payments restart in January

In roughly two months, millions of consumers who borrowed to take out federal student loans will need to dig a little deeper into their pockets to cover another bill for $150 to $300 a month or maybe even more, depending on what they owe.

Where will they get the money?

Many times people get into a financial mess because they don’t plan for the unexpected, but it’s likely that many aren’t preparing for what’s set to happen next year either.

Right now, many consumers should be calculating how they’re going to hand over more money in 2023 after the payment pause on most federal student loans ends in December. Payments – which have not been required for nearly three years – are scheduled to resume in January.

“We’re anticipating that their budgets are going to be thrown out of whack with student loan payments starting up,” said Trent Graham, a financial counseling expert for the nonprofit, Farmington Hills, Michigan-based GreenPath Financial Wellness.

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During the past year, he said, many consumers found themselves in a financial bind as they’ve had to deal with the higher costs of everything from gas to groceries to utilities and other expenses.

He expects that more families will face financial stress – especially if they’ve been borrowing more on credit cards to keep spending – as student loan payments resume.

For nearly three years, millions of borrowers with federal student loans have had one less bill to pay each month. They’ve seen repeated extensions granted since the moratorium on student loan payments began in March 2020 as part of pandemic-related relief efforts.

Much uncertainty about student loan relief

Could another such extension take place? Maybe but it’s not in the cards yet.

The Biden administration announced an ambitious but controversial federal student loan forgiveness program in late August. A simple online application was officially launched on Oct. 17 by the U.S. Department of Education at its website StudentAid.gov.

About 22 million borrowers applied for relief during that first week.

But the massive student loan forgiveness program was quickly put on hold after a temporary stay was issued by a federal appeals court on Oct. 21.

The action by the Eighth U.S. Circuit Court of Appeals in St. Louis temporarily blocks the Department of Education from processing debt relief while the court considers challenges brought by attorneys from six Republican-led states.

Opponents say President Joe Biden does not have the authority to forgive federal student loans because Congress did not authorize the massive debt relief program. Conservatives say the Biden administration has no grounds to invoke the HEROES Act of 2003 to offer widespread forgiveness to these borrowers during a national emergency, such as the pandemic.

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Even so, the Education Department is still encouraging borrowers to apply for student loan forgiveness online as the application remains open while debt discharge is paused. “We encourage you to apply if you are eligible. We will continue to review applications. We will quickly process discharges when we are able to do so and you will not need to reapply,” the Education Department states on its StudentAid.gov website.

Student loan borrowers should still plan on the repayments resuming in January, if the appeals court stay is lifted soon, according to Mark Kantrowitz, a student loan expert who is the author of “How to Appeal for More College Financial Aid.”

“If the court case goes on for a long time or the president’s student loan forgiveness plan is blocked permanently by the courts, the president might continue the payment pause for the duration of his presidency,” Kantrowitz said.

Saving ahead of time could help

No one knows how any of this will all play out, but it does not hurt to start setting aside cash now to cover monthly payments for federal student loans whenever they resume.

The best way to budget is to take a close look at how much money is coming in each month and how much is being spent. If you’re already spending more than you’re making, it’s necessary to cut back and stop turning to credit cards or other loans to make ends meet.

“When you say budget, it feels like it’s restricting you,” said Graham, of GreenPath.

Yet when you review your true financial picture, he said, you are allowing yourself to live with less stress. If you have a better understanding of your limits, you’re less likely to just simply dig yourself into more debt. GreenPath offers credit and debt counseling for free; some other services have fees.

Look into repayment options

One option: Federal student loans offer income-driven repayment plans that can reduce your monthly payments.

Even in light of the uncertain situation ahead, borrowers can still contact their loan servicer now to sign up for an income-driven repayment plan, Kantrowitz said. Or they can sign up when repayment restarts.

Borrowers will need to provide information about their income and family size as part of an application for an income-driven repayment plan.

“But, if their income is less than 150% of the poverty line, they will get a monthly payment of zero,” Kantrowitz said. And that’s one way of effectively continuing a payment pause if they are low-income.

Switching to an income-driven repayment plan lowers your monthly payment but stretches out your repayment term from a more traditional 10 years to 20 years or 25 years. Interest continues to build.

The pandemic-related moratorium suspended payments, temporarily put a 0% interest rate on those loans and stopped collections on defaulted loans.

“The typical student loan payment is a few hundred dollars,” Kantrowitz said.

Where to find an extra $200 a month?

Many people, of course, haven’t been setting aside that money in savings for the day when payments become due. Instead, the money might have gone to cover other big bills, including credit card debt.

Options for finding extra cash: Cut out what isn’t essential. Slow down some spending on things that you really can live without. Ask for a raise. Find ways to sell items you’re not using to raise cash. Pick up an extra job on the weekends. Research income-driven repayment plan options.

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The average loan amount outstanding in the federal Direct Loan program is $37,728. If the loans have a 5% interest rate and a 10-year repayment term, Kantrowitz said, the borrower could be looking at a $400 monthly payment.

“On a 20-year repayment term, it’s $249,” he said. “The payment may be even lower under an income-driven repayment plan.”

The Biden plan to forgive many federal student loans offers up to $10,000 in student loan forgiveness for many borrowers. Those who had Pell Grants in college could see up to $20,000 in federal student loans forgiven.

For many people, all of their student loans aren’t disappearing even if the Biden plan is able to continue to move forward.

“Some borrowers might not realize that repayment will resume, or won’t think about it until the payments actually resume,” Kantrowitz said.

One major concern about the restart of the repayment plan was that up to one-third of borrowers might have moved since the payment pause. But Kantrowitz noted that 22 million borrowers provided their current email address and telephone number as part of the loan application for debt relief.

Steps to take to before payments resume

To prepare for payments to resume, the Education Department’s suggestions include:

• Update your contact information in your profile on your loan servicer’s website and in your StudentAid.gov profile.

• Review your auto-debit enrollment or sign up for the first time by logging into your loan servicer’s website or contact your loan servicer directly.

• Check out Loan Simulator to find a repayment plan that meets your needs and goals or to decide whether to consolidate.

The early plan called for trying to get student borrowers to apply for federal student loan forgiveness at StudentAid.gov before Nov. 15 to give loan servicers time to lower monthly federal student loan payments to reflect the loan forgiveness once the payment moratorium ended in January.

If $10,000 in debt is forgiven, Kantrowitz said, one might expect that a monthly payment could drop much as $100. You could save up to $200 on $20,000 in forgiveness.

“This will make the student loan payments for those who still owe student loans much more affordable,” Kantrowitz said.

How much your payment might go down would vary on forgiveness. Also, many borrowers in income-driven repayment plans in many cases would not see lower monthly payments but would repay their remaining debt more quickly, Kantrowitz said.

But then again, we don’t know if the loan forgiveness program will continue to be blocked. We also don’t know how soon payments would be adjusted. Or really how any of this ultimately will play out.

Yet, it’s best to plan ahead – something that isn’t always easy to do. But it’s a whole lot less stressful to have some idea of how you’d pay the bill when it does show up.

Contact Susan Tompor: [email protected]. Follow her on Twitter @tompor. To subscribe, please go to freep.com/specialoffer. Read more on business and sign up for our business newsletter.

This article originally appeared on USA TODAY: Federal student loan payments to restart in January: How to prep

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