By Brian J. O'Connor
One of the most sensible options is the income-driven repayment plans, which can reduce your loan payments somewhere between 10% and 20% of your discretionary income, based on the size of your family and household earnings. For some borrowers, the payments can be adjusted to as little as $0, and any remaining debt is supposed to be forgiven after 20 or 25 years. There are four plans offered: Income-Based Repayment (IBR); Pay As You Earn (PAYE); Revised Pay As You Earn (REPAYE); and Income-Contingent Repayment (ICR).
If you hadn’t considered this option before the pandemic, it’s worth doing now and makes even more sense if your financial situation or family size has changed during the payment pause. If you already were on an income-based plan and your situation changed, you can ask to have the payment recalculated. You can find the application for the repayment plan here.
Check the extended student loan repayment plan: Borrowers with at least $30,000 of Direct or FFELP Loans can enroll in the Extended Student Loan Repayment Plan. The plan stretches your payment period from the 10-year standard student loan repayment period to 25 years. This gives you a lower monthly payment, but by extending the loan, you’ll also pay more interest over the life of the loan.
Consider refinancing your loans – but be careful: Even though interest rates may be heading up, refinancing your loans with a private lender might lower your payment. However, refinancing to a private loan means you’ll give up the opportunity to take advantage of federal options, such as special reduced repayment plans or loan forgiveness programs. See the lowest student loan refinancing rates you can get here .
Review your potential savings, and if you’re in a stable financial situation where you know you’ll be able to make timely payments during the term of the loan, refinancing may make sense. If you owe a substantial amount of student debt and think your financial situation might change, you’re likely better off keeping your federal loans untouched.
Ask for forbearance: Some people are better off since the pandemic, thanks to the payment pause, pandemic relief money and savings on commuting costs when you work from home. But many others borrowers are in worse financial shape after they became ill, lost childcare, or because businesses closed or laid off workers. In that case, look at the various student loan forbearance programs. They’re not permanent, but they can help you out in tough times. They include:
Unemployment deferment: If you’re not working;
Economic hardship deferment: If you’re earning very little money, are in the Peace Corps or collecting welfare;
General forbearance: Based on financial issues, medical costs, and other considerations, these are issued at the loan servicer’s discretion;
Debt burden forbearance: Granted if your payments constitute more than 20% of your discretionary income.
You have to apply for these benefits and there’s no guarantee you’ll be approved. In addition, you may have to pay fees, and uncollected interest from the forbearance usually is added to your loan balance (a process called “interest capitalization”). In addition, a forbearance may be reported to credit bureaus and hurt your credit report.
Consider consolidation: You can consolidate your direct federal loans into one new loan, which can be put on an income-driven repayment plan. Doing his can lower your payments by giving you a longer loan term and access to additional income-based repayment plans. But consolidation also means any unpaid interest is added to your loan balance, so you’ll be paying interest on that interest. For a look at all the pros and cons, go here .
Rehabilitate loans in default: While you’re still free from making any payments or seeing your wages garnished for collection, consider bringing defaulted loans current if you can. Rehabilitating your loan will halt garnishment and other collection actions, such as having your tax refund seized. It also allows you to access benefits such as deferment, forbearance, a choice of repayment plans and loan forgiveness.
For borrowers with a Federal Direct, Family Education (FFEL) or Perkins Loan, contact your loan servicer to start the process. You’ll be required to state in writing that during the next 10 months you’ll make nine payments within 20 days of the due date for a Direct or Family Education Loan. The time period is nine months for a Perkins Loan.
The payments should be reasonable for your financial situation, which is 15% of your discretionary income divided by 12. If that’s still more than you can afford, ask your servicer to review your documented income and expenses to see if you can arrange a lower payment amount. There’s more involved in this process, so check StudentAid.gov for more details.
What about changes to Public Service Loan Forgiveness (PSLF)?
This program was designed to encourage college graduates to go into certain types of work – such as teaching, nursing and firefighting – by wiping out any student loan balance after the borrower made 120 full, on-time loan payments. The program was mired in administrative problems, and thus before it was extended in October 2021, only about 16,000 borrowers had ever received the promised loan forgiveness.
During the pandemic, the Biden Administration announced plans for several adjustments and reforms to the PSLF, including making applications easier, removing barriers for military service, simplifying what kinds of payments count toward the program, and other improvements. Those adjustments, and the steps borrowers should take to qualify, are detailed here.
Who’s covered by the PSLF reforms? The revisions are aimed at helping borrowers who work in the federal government, served as active duty members of the military, have been enrolled in other payment programs or were turned down for earlier versions of the program. To qualify for the public service program, borrowers typically need to work for a federal, state, local or tribal government or not-for-profit organization, AmeriCorps or Peace Corps, or service in the U.S. military. To see if your employer qualifies, check here .
What are the Biden Administration’s waiver programs? Under this initiative – called the Limited PSLF Waiver program – the rules of the Public Service Loan Forgiveness program were relaxed to make more borrowers eligible. Some previously ineligible payments that didn’t count toward forgiveness, such as payments made on students loans not covered by the program, can be counted toward the public service program, as well as loans that were in forbearance. In some cases, borrowers may need to consolidate their loans or take other steps to qualify.
What is the “fresh start” offered by Biden’s Administration?
When the student loan payment freeze was extended in April, the Department of Education also announced plans to allow “all borrowers with paused loans to receive a ‘fresh start’ on repayment by eliminating the impact of delinquency and default and allowing them to reenter repayment in good standing.” Borrowers whose loans were delinquent or in default even before the pandemic would automatically have their loans returned to being current at the end of the payment pause, with the delinquencies and defaults removed from their credit history.
However, as of early August details on the fresh start arrangements haven’t been announced by the Education Department. At that time, the National Association of Student Financial Aid Administrators (NASFAA) reported that the roll-out of the program seemed much more limited than originally intended, and could fall far short of helping the original estimate of 7 million borrowers with past-due loans.
In a post on the association’s web site, it was reported that, “the initiative appears to be targeted to borrowers who are in default and enrolled in a post-secondary institution, which would represent a small subset of student loan borrowers, and it is unclear when or whether the benefit will be expanded to other delinquent or defaulted borrowers.” No new information has been published by either the Department of Education or the Office of Federal Student Aid at the time.
What are the chances for another extension on the loan freeze?
As of Aug. 15, several news outlets reported that if any extension was coming, it would occur much closer to the deadline for re-starting payments than any of the previous extensions. According to Business Insider, “Over recent weeks, the Education Department has directed loan companies to halt messaging to student-loan borrowers regarding restarting payments, which is the same thing the department did leading up to the last extension of the pause.” The Wall Street Journal , which is owned by the same parent company as MarketWatch, also reported that loan servicers had been “instructed to hold off on sending billing statements ahead of an Aug. 31 deadline for ending the pandemic freeze on loan payments.” a