Student loan payments were suspended during the COVID-19 pandemic, but since the government declared the public health emergency officially over, student loan payments restarted last month. Interest had already started to accrue earlier this year, on September 1, meaning the amount owed had already started to rise even before the payments were due.
The restart of payments is expected to put additional pressure on some borrowers. A survey by Credit Karma found that 45% of borrowers expected to default once repayments restarted. With many borrowers facing difficult financial decisions this fall, and some people making payments for the very first time, it’s important to understand all your options when it comes to student loans.
For more information, here’s how a first-time student loan payer prepared to start making payments.
When will my student loan payments start again?
Although student loan payments officially resumed on October 1, 2023, your specific payment date will depend on your loan servicer. So make sure you know your administrator’s specific guidelines. Whether you’re a student loan veteran or it’s your first time paying, you need to know who your student loan servicer is. Essentially, your loan servicer is the company that makes sure you pay your student loans, and who you should talk to if you think you’re behind on your payments.
Regardless of whether you are new to student loans, listening to expert advice for borrowers is always a good idea when it comes to making decisions about your student loans. Arming yourself with good information is helpful when making decisions that can feel overwhelming.
What happens if I decide not to pay my student loans?
There is a timeline for what can happen if you decide not to pay back your student loans. It’s not pretty and it carries some serious consequences.
But before we get into those consequences, let’s first look at what exactly happens if you default on your student loans.
First, defaulting on your student loans can have the same consequences as defaulting on your credit card bill. Your credit score can take a hit if you allow your loans to become delinquent or if you default on your student loans.
Let’s say you stop paying your monthly student loans. The first day after you miss a payment on your due date, your loan becomes delinquent. According to the Federal Student Aid website, that amount is considered past due until it is paid off.
If you allow your student loan to become delinquent and it remains delinquent for 270 days, your loan will be declared in default. If you default on a loan repayment, it means that you have not paid your loan as you agreed upon when you took out your loan. Your manager will not simply default you without communicating with you; he must make several attempts to contact you before your loan goes into default.
Once your loan defaults, there are more consequences. The federal government is serious about getting its money back. The government can seize your tax returns or garnish your wages to pay off your loan. Garnishing your wages essentially means that the government is taking part of your monthly income to pay back the loans. Your credit score will also take a hit if you allow your loan to default.
Most of these negative consequences for defaulting on your student loans will be temporarily suspended during the “one-year ramp” for restarting payments.
What is the one-year ramp for student loan payments?
When President Joe Biden announced the end of the student loan payment holiday, he instituted a one-year grace period that will reduce or eliminate many of the negative consequences of defaulting on your student loans.
The ramp is a 12-month period that begins on October 1 and lasts until September 30, 2024. During this year, some of the most serious consequences of defaulting on your student loans will be suspended. That means no delinquencies, defaults, damage to your credit score, or other unfortunate things that can result from defaulting on your loans.
However, borrowers who are missing out on their student loan payments should proceed with caution. Just because the consequences of defaulting on your loans have been suspended does not mean that your loan balance will not continue to rise due to additional interest. While missing an under-ramp payment may seem like it has no consequences, that’s actually not the case. Once the ramp is over, you’re on the hook for all the interest you accrued over the year.
What should I do if I cannot pay my student loans?
If you are unable to pay your student loans, it is best to contact your lender and ask about adjusting your repayment plan.
Your lender may suggest a number of options, including forbearance or forbearance. Each option allows you to temporarily defer or reduce your student loan payments.
If deferred, no interest will accrue on most loan balances. With patience, interest will accrue on your loan balance. Deferrals require a qualifying event, such as becoming a student, enlisting in the military or losing a job. If you do not qualify for deferment, deferrals can pause payments for up to one year. Neither forbearance nor forbearance will affect your credit score.
If forbearance or forbearance doesn’t work for you and your loan, don’t worry. There are still other repayment options that can help you continue to make progress on paying off your loans at a level you can afford.
What are income-driven repayment plans?
Income-driven repayment plans are programs that adjust the terms of your loan based on the limitations of your income.
There are currently four income-based repayment plans available: the Pay As You Earn repayment plan, or PAYE; the Income-related Repayment Plan (IBR); the Income Contingent Repayment Plan, or ICR; and the Save for a Valuable Education plan, or SAVE. The SAVE plan is the latest addition to these offerings and is the Biden administration’s strategy to help borrowers manage their loan repayments by closely linking payment size to the borrower’s income and family size.
For more information, you can take a closer look at the SAVE plan here.
The bottom line on missing student loan payments
If you find yourself in a difficult situation regarding your student loans, it is best to contact your loan servicer to learn more about all your options to manage your student loans in a more sustainable way. The transition to paying back your student loans may seem scary, but arming yourself with information and a plan can help reduce your anxiety and stress.
For more information, watch out for these student loan scams and who gets refunds from loan scams.