NEW YORK (AP) — A three-year pause on federal student loan repayments will soon end, regardless of the Supreme Court’s ruling this week on a White House plan to write off billions of dollars in student debt. student loans.
The conservative-leaning court appears poised to overturn President Joe Biden’s plan, which would erase $10,000 in federal student loan debt for those with incomes below $125,000 a year or households earning less than $250,000. He also wants to set aside an additional $10,000 for those who received federal Pell grants to attend college.
Payments that were halted due to COVID will resume in the fall no matter what, but around 43 million borrowers could see their balances diminished or completely wiped out if the court rules the plan can go ahead.
Interest on student loans will begin to accrue on September 1 and payments will resume in October.
Here’s what you need to know to prepare to start repaying loans:
HOW SHOULD I PREPARE FOR THE RESTART OF STUDENT LOAN PAYMENTS?
Betsy Mayotte, president of the Institute of Student Loan Counselors, encourages people not to make any payments until the break is over. Instead, she says, put what you would have paid into a savings account.
“So you’ve kept the habit of making the payment, but (you) also earn a bit of interest,” she said. “There’s no reason to send that money to student loans until the last minute 0% interest rate.”
Mayotte recommends borrowers use the loan simulation tool on StudentAid.gov or the one on the TISLA website to find a payment plan that best suits their needs. The calculators tell you what your monthly payment would be under each available plan, as well as your long-term costs.
“I really want to focus on the long term,” Mayotte said.
Sometimes when borrowers are in dire financial straits, they choose the option with the lowest monthly payment, which can cost more over the life of the loan, Mayotte said. Rather than “set it and forget it,” she encourages borrowers to reevaluate when their financial situation improves.
WHAT IS AN INCOME-DRIVEN REPAYMENT PLAN?
An income-focused repayment plan fixes your monthly student loan amount at an amount that should be affordable based on your income and family size. It factors in different expenses in your budget, and most federal student loans qualify for at least one of these types of plans.
Typically, your payment amount under an income-based repayment plan is a percentage of your Discretionary Income. If your income is low enough, your payment could be as low as $0 per month.
If you want to repay your federal student loans under an income-based plan, the first step is to complete an application through the Federal Student Aid website.
TALK TO AN ADVISOR
Fran Gonzales, 27, who lives in Texas, works as a supervisor for a financial institution. She has $32,000 in public student loans and $40,000 in private student loans. During her public loan payment break, Gonzales said she was able to pay off credit card debt, buy a new car and pay off two years of private loans while saving money. His private student loan payment has been $500 a month, and his public student loan payment will be $350 a month when he restarts.
Gonzales recommends anyone with a student loan speak with a mentor or financial advisor to learn about their options, as well as to ensure they are on an income-driven repayment plan.
The Federal Student Aid website can help direct you to counselors, as well as organizations such as the Student Borrower Protection Center and the Institute of Student Loan Counselors.
“I was the first in my family to go to college, and I could have saved money with grants and scholarships if I had known someone who knew about college,” said she declared. “I could have gone to community college or lived in cheaper housing…It’s a huge financial decision.”
Gonzales graduated in business marketing and says she was “horrible with finances” until she started working as a loan officer herself.
Gonzales’ mother works in retail and her father in the airport, she said, and both encouraged her to pursue higher education. For his part, Gonzales is now trying to let other student loan holders know what they’re up to and their choices.
“All the young people I meet, I try to educate them.”
CAN I SET UP A PAYMENT PLAN FOR MY STUDENT LOANS?
Yes — payment plans are still available. Even so, some advocates encourage borrowers to wait now, as there is no financial penalty for non-payment while payments and accrued interest are paused.
Katherine Welbeck of the Student Borrower Protection Center recommends logging into your account and making sure you know your manager’s name, your due date, and whether you’re enrolled in the best income-based repayment plan.
WHAT IF I CAN’T PAY?
If your budget doesn’t allow you to resume payments, it’s important to know how to handle the possibility of default and delinquency on a student loan. Both can hurt your credit rating, making you ineligible for further help.
If you are in a short-term financial situation, according to Mayotte, you can benefit from a postponement or a forbearance, which allows you to temporarily suspend payment.
To determine if deferment or forbearance are good options for you, you can contact your loan manager. One thing to note: interest still accrues during adjournment or abstention. Both can also impact potential loan forgiveness options. Depending on the terms of your postponement or forbearance, it may make sense to continue paying interest while payments are suspended.
HOW CAN I REDUCE COSTS WHEN PAYING BACK MY STUDENT LOANS?
— If you sign up for automatic payments, the repairer takes a quarter of a percent off your interest rate, according to Mayotte.
— Income-driven repayment plans are not for everyone. That said, if you know you will eventually qualify for forgiveness under the Civil Service Loan Forgiveness Program, it makes sense to make the lowest monthly payments possible, as the rest of your debt will be forgiven once once this decade of payments is over.
— Reevaluate your monthly student loan repayments during tax time, when you already have all your financial information in front of you. “Can you afford to increase it? Or do you need to decrease it? says Mayotte.
— Divide the payments in the way that suits you best. You might consider two installments per month, instead of one large monthly payment.
ARE STUDENT LOANS PAID AFTER 10 YEARS?
If you worked for a government agency or non-profit organization, the Civil Service Loan Cancellation Program offers cancellation after 10 years of regular payments, and some income-based repayment plans cancel the remainder of a borrower’s debt after 20 to 25 years.
Borrowers should ensure they are enrolled in the best possible income-based repayment plan to qualify for these programs.
Borrowers who have been defrauded by for-profit colleges may also seek Borrower Defense and receive relief.
These programs will not be affected by the Supreme Court’s decision.
___
The Associated Press receives support from the Charles Schwab Foundation for educational and explanatory reports aimed at improving financial literacy. The independent foundation is separate from Charles Schwab and Co. Inc. The AP is solely responsible for its journalism.