NEW YORK (AP) — After three years, the pandemic-era freeze on student loan repayments will end in late August.
It may seem tempting to continue not making payments, but the consequences can be serious, including damage to your credit score and exclusion from future aid and benefits.
More than 40 million Americans will have to start repaying their federal student loans again at the end of the summer under a congressional debt ceiling agreement.
Millions are also waiting to hear whether the Supreme Court will allow President Joe Biden’s student loan forgiveness plan. But payments will resume regardless of the judges’ decision.
This means tough decisions for many borrowers, especially those who find themselves in already difficult financial situations.
Experts say delinquency and bankruptcy should be options of last resort, and that deferment and forbearance – which suspend payments, although interest may continue to accrue – are often better in the short term.
WHAT IF I DON’T MAKE A STUDENT LOAN PAYMENT?
Once the moratorium ends, borrowers who cannot or do not pay risk delinquency and possibly default. This can seriously damage your credit rating and make you ineligible for further assistance and government benefits.
If you’re struggling to pay, counselors encourage you to first check if you’re eligible for an income-based repayment plan, which determines your payments based on your expenses. You can determine this by visiting the Federal Student Aid website. If you worked for a government agency or non-profit organization, you may also be eligible for the Civil Service Loan Forgiveness Program, which forgives student debt after 10 years.
Carolina Rodriguez, director of the Education Debt Consumer Assistance Program at the Community Service Society of New York, points out that anyone temporarily unemployed should be able to qualify for a $0 payment plan. And many more qualify based on income and family size.
“The repercussions of falling into delinquency can be quite severe,” Rodriguez said. “The federal government can administratively intercept tax refunds and garnish wages. And it can affect Social Security, retirement, and disability benefits. Does that make financial sense at this point? Probably not.”
Rodriguez says his organization always advises against deferment or forbearance, except after a borrower has exhausted all other options. In the long term, these financial choices offer little benefit, as some loans will continue to earn interest while they are deferred.
Abby Shafroth, senior attorney and director of the Student Loan Borrower Assistance Project at the National Consumer Law Center, said that of the two, deferment is usually a better option.
This is because interest generally does not accrue on Direct Subsidized Loans, the Subsidized Portion of Direct Consolidation Loans, Subsidized Federal Stafford Loans, the Subsidized Portion of FFEL Consolidation Loans, and Federal Perkins Loans. All other federal student loans that are deferred will continue to earn interest.
“Withholding allows you to defer payments without it being held back, but interest accrues. So you’re going to see your balance grow every month.”
WHAT ABOUT THE DECLARATION OF BANKRUPTCY?
For most student borrowers, it is still very difficult to have your loans repaid or canceled through bankruptcy. Borrowers must prove a very strict standard of financial condition, called “undue hardship”.
“That doesn’t mean people shouldn’t be interested in it,” Rodriguez said. “But they may not be able to repay their loans.”
For borrowers who show this level of financial pressure, chances are they have other options, Rodriguez said.
She advises borrowers to make sure they speak to a bankruptcy attorney who understands student loan bankruptcy, which requires a different process than other types of bankruptcy.
Shafroth of the NCLC says new student loan bankruptcy guidelines have been released in recent years.
“Although it is difficult to get your loans canceled through the bankruptcy process, a growing number of borrowers are eligible to get their loans canceled this way,” she said. declared. impossible.’ But it is more and more possible.
WHAT HAPPENS IN CASE OF LOAN DEFAULT?
When you are 270 days behind on a loan, or about 9 months, the loan appears on your credit report as being in default.
“At this point, it’s not just behind, it’s in the collections,” Shafroth said. “That’s when you become ineligible for new federal student aid. A lot of people default because they couldn’t graduate the first time around. This prevents them from returning to school.
Once a loan is in default, it is subject to the collection processes mentioned above. This means the government can garnish wages (without a court order) to repay the loan, intercept tax refunds, and garnish portions of Social Security checks and other benefit payments.
WHAT ARE THE OTHER OPTIONS IF I CANNOT MAKE PAYMENTS?
Shafroth said many borrowers may still be eligible for loan forgiveness through a patchwork of programs outside of the debt relief package offered by the Biden administration.
“If your school closed before you could complete your program, you are entitled to assistance. If your school lied to you or misrepresented your enrollment score, you can file a Borrower’s Defense Claim and seek cancellation of your loan based on that,” she said. “If you have a disability, you can sometimes have your loans canceled on that basis.”
Shafroth encourages borrowers to check the student aid website to see what their options are before they miss payments.
WHAT IF MY LOANS WERE IN DEFAULT BEFORE MARCH 2020?
Under the Biden administration’s Fresh Start program, borrowers with federal student loans that were in default before the break have a chance to become current.
Borrowers who were in default will not be subject to collection processes or have their wages garnished until around August 2024, about a year after the payment freeze ends. These borrowers were also allowed to reapply for federal student loans to earn degrees. Finally, these delinquent loans are now reported to the credit bureaus as outstanding.
That said, borrowers must take action if they want to remain in default after this one-year leniency period ends.
To clear your default record, you must contact the Department of Education’s Default Resolution Group online, by phone, or by mail, and ask the group to remove the loans from default through the Fresh Start Policy. In four to six weeks, any default records will be removed from your credit file and the loans will be placed with a loan servicer. It will also give you access to income-based repayment plans and the cancellation of public service loans, if applicable.
WHAT IF I WAS IN LATE PAYMENT OR IN DEFAULT BEFORE MARCH 2020?
The Fresh Start program also applies to borrowers who were in default prior to the payment break. These accounts will be considered current, and borrowers will have the option of enrolling in income-driven repayment plans that can reduce bills to as little as $0, or request deferral, forbearance, or bankruptcy.
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