Federal student loan payments are returning: here’s how to get ready
The Biden administration has announced that the three-year pause on federal student loan payments will be coming to an end on October 1, 2023, and interest will begin accruing again in September. This pause began in 2020 when interest rates for all government-held federal student loans were zeroed out due to economic hardships caused by the pandemic.
The announcement means that many borrowers now need to rethink their budgets to include these payments. But that doesn’t mean there aren’t ways to minimize the impact of payments on your overall financial picture. Here are some ways to prepare for your payments to resume without added stress to you or your budget.
Confirm your payment information
One easy starting point is to make sure your student loan servicer has all your correct contact and payment information. Many borrowers were transitioned to a new servicer during the pause, so be sure to check in and confirm which servicer you’ll be working with going forward.
You may also have experienced some life changes in the three years since you last made federal student loan payments. This means you may need to provide some new contact, income and payment information to your loan servicer. Doing so now will make the transition back to repayment smoother and ensure you receive any important communication about your loans in a timely manner.
The pause did not impact private loans, but if you have both federal and private loans, review your budget and make sure you’ll be able to afford payments for both.
If you’re unsure which company is your student loan servicer, the Federal Student Aid Information Center can provide that information to you. Give them a call at 800-433-3243.
Check your payment amounts and plans
To get a better idea of what your payments will look like, contact your servicer, and ask them to help you determine the amount you’ll owe each month and what the interest rates are.
If you were on an automatic payment plan prior to March 13, 2020, ask your loan servicer whether that plan is still in place or if you need to set up a new one. Then, verify that the automatic payment plan is still connected to the bank account that you want to use for payments.
If you were previously on an Income-Driven Repayment (IDR), such as the Pay As You Earn Repayment Plan (PAYE) or other similar plans, you may be asked to recertify your income to determine your payment amount. Your loan servicer will likely contact you to recertify your income and other information, but your payments may look different if you do not provide the requested information on time.
IDR plans can lower your monthly student loan payments based on your income and family size. The amount you pay is a percentage of your discretionary income—usually no more than 10-20 percent—and payments can even be as low as $0 per month. The Biden administration also announced a new repayment plan, called the Saving on a Valuable Education (SAVE) plan, that reduces the maximum borrowers would pay to 5 percent of their discretionary income. Learn more about IDR plans from the Federal Student Aid Office.
What if money is tight?
Fortunately, the Department of Education has announced a 12-month “on-ramp” to student loan repayments. From October 1, 2023, to September 30, 2024, borrowers who miss monthly payments will not be reported to credit bureaus, placed in default, or referred to debt collection agencies.
There is also still time to save in preparation for interest rates to kick in and payments to resume. One option is to set aside some extra money from each paycheck into a high-yield savings account. You can make a large, lump sum payment just before the loans recapitalize. Not only will this reduce your loan balance, but it could also save you money down the line when it comes to interest payments.
What about refinancing?
If your federal loans have higher interest rates, see if you can refinance your loans to a lower rate. Refinancing could help you lower your monthly payment and save money over the life of the loan. If you have many federal loans with higher rates, it can be difficult to keep track of them all. Refinancing can help you consolidate those federal loans into one easy-to-manage and predictable monthly payment with a set term.
That said, refinancing might not be for everyone. It generally only makes sense if you are lowering your loan rates or getting a better repayment term for your goals. Refinancing usually also means that you’ll lose certain federal protections, such as repayment grace periods, Public Service Loan Forgiveness—or any other government forgiveness—and income-driven repayment options. Your financial institution usually has experts who can help you understand whether refinancing is right for you.
Summary
Before you stress yourself out about your federal student loans, take a deep breath. There is still time to prepare and adopt strategies to help you manage that debt without harming your budget or financial goals. There is no better time than now to start reviewing your loan information, checking your budget and confirming details with your servicer. Then, you—and your finances—will be ready when repayment begins.