INDIANA – After three years, the pandemic-era freeze on student loan payments will end soon. Student loan interest will start accruing on September 1 and payments are starting in October.
The consequences can be severe if you don’t resume your payments.
More than 40 million Americans will have to start making federal student loan payments under the terms of a debt ceiling deal approved by Congress.
Millions are also waiting to find out whether the Supreme Court will allow President Joe Biden’s student loan forgiveness plan to go ahead.
But payments will resume regardless of what justices decide.
That means tough decisions for many borrowers, especially those in already-difficult financial situations.
What Happens if you don’t make the student loan payments
Once the moratorium ends, borrowers who can’t or don’t pay risk delinquency and eventually default. That can badly hurt your credit rating and make you ineligible for additional aid and government benefits.
If you’re struggling to pay, advisers first encourage you to check if you qualify for an income-driven repayment plan, which determines your payments by looking at your expenses. You can determine this by visiting the Federal Student Aid website. If you’ve worked for a government agency or a non-profit organization, you could also be eligible for the Public Service Loan Forgiveness Program, which forgives student debt after 10 years.
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 accrue interest.
Experts say anyone temporarily unemployed should be able to qualify for a $0 payment plan. And many others qualify based on income and family size.
The federal government can administratively intercept tax refunds and garnish wages if the payments are not made. It can also affect Social Security, retirement, and disability benefits.
Experts say that delinquency and bankruptcy should be options of last resort and that deferment and forbearance — which pause payments, though interest may continue to accrue — are often better in the short term.
For most student loan borrowers, it’s still very difficult to have their loans discharged, or canceled, through bankruptcy. Borrowers must prove a very hard standard of financial circumstances, called “undue hardship.” Borrowers need to make sure they are speaking to a bankruptcy attorney who understands student loan bankruptcy, which requires a different proceeding than other types of bankruptcy.
What happens when a loan goes into default
When you fall behind on a loan by 270 days — roughly 9 months — the loan appears on your credit report as being in default and will go to collections.
When that happens you become ineligible to take out new federal student aid, preventing the student to continue their education.
Once a loan goes into the collection processes the government can garnish wages (without a court order) to go towards paying back the loan, intercept tax refunds, and seize portions of Social Security checks and other benefit payments.
What if my loans were in default before March 2020
Under the Biden administration’s Fresh Start program, borrowers with federal student loans who were in default before the pause have a chance to become current.
Borrowers who were in default will not be subject to collection processes or have wages garnished through about August 2024, or roughly one year after the payment freeze ends. These borrowers have also been granted permission to apply for federal student loans again, to complete degrees. Lastly, these defaulted loans are now being reported to credit bureaus as current.
But borrowers must take action if they want to stay out of default after this year-long leniency period ends.
To eliminate your record of default, you should contact the Education Department’s Default Resolution Group online, by phone, or by mail, and ask the group to take the loans out of default via the Fresh Start policy.
In four to six weeks, any record of default will be removed from your credit report, and the loans will be placed with a loan servicer. This will also give you access to income-driven repayment plans and Public Service Loan Forgiveness, if applicable.
The Fresh Start program also applies to borrowers who were delinquent prior to the payment pause. Those accounts will be considered current, and borrowers will have the option to enroll in income-driven repayment plans that can lower bills to as little as $0 or to apply for deferment, forbearance, or bankruptcy.
Information: Associated Press with support from Charles Schwab Foundation for educational and explanatory reporting to improve financial literacy.
