Student loan repayment: How to prepare for payments when pandemic freeze ends

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Graduation hats during commencement. via Getty Creative Images

A three-year pause on student loan payments will end this summer regardless of how the Supreme Court rules on the White House plan to forgive billions of dollars in student loan debt.

Since Congress approved a debt ceiling deal negotiated by House Speaker Kevin McCarthy and President Joe Biden, payments will resume in late August, ending any lingering hope of a further extension of the pause that started during the COVID pandemic. Even if the deal falls through, payments will resume 60 days after the Supreme Court decision.

That ruling is expected sometime before the end of June. No matter what the justices decide, more than 40 million borrowers will have to start paying back their loans by the end of the summer at the latest.

Here's what to know to get ready to start paying back loans:

How should I prepare for student loans payments to restart?

Betsy Mayotte, President of the Institute of Student Loan Advisors, encourages people not to make any payments until the pause has ended. Instead, she says, put what you would have paid into a savings account.

"Then you’ve maintained the habit of making the payment, but (you're) earning a little bit of interest as well," she said. "There’s no reason to send that money to the student loans until the last minute of the 0% interest rate."

Mayotte recommends borrowers use the loan-simulator tool at StudentAid.gov or the one on TISLA’s website to find a payment plan that best fits their needs. The calculators tell you what your monthly payment would be under each available plan, as well as your long-term costs.

"I really want to emphasize the long-term," Mayotte said.

Sometimes, when borrowers are in a financial bind, they’ll choose the option with the lowest monthly payment, which can cost more over the life of the loan, Mayotte said. Rather than "setting it and forgetting it," she encourages borrowers to reevaluate when their financial situation improves.

What's an income-driven repayment plan?

An income-driven repayment plan sets your monthly student loan payment at an amount that is intended to be affordable based on your income and family size. It takes into account different expenses in your budget, and most federal student loans are eligible for at least one of these types of plans.

Generally, your payment amount under an income-driven repayment plan is a percentage of your discretionary income. If your income is low enough, your payment could be as low as $0 per month.

If you’d like to repay your federal student loans under an income-driven plan, the first step is to fill out an application through the Federal Student Aid website.

Talk to an adviser

Fran Gonzales, 27, who is based in Texas, works as a supervisor for a financial institution. She holds $32,000 in public student loans and $40,000 in private student loans. During the payment pause on her public loans, Gonzales said she was able to pay off her credit card debt, buy a new car, and pay down two years’ worth of private loans while saving money. Her private student loan payment has been $500 a month, and her public student loan payment will be $350 per month when it restarts.

Gonzales recommends that anyone with student loans speak with a mentor or financial advisor to educate themselves about their options, as well as making sure they're in an income-driven repayment plan.

The Federal Student Aid website can help direct you to counselors, as well as organizations like the Student Borrower Protection Center and the Institute of Student Loan Advisors.

"I was the first in my family to go to college, and I could have saved money with grants and scholarships had I known someone who knew about college," she said. "I could have gone to community college or lived in cheaper housing … It’s a huge financial decision."

Gonzales received her degree in business marketing and says she was "horrible with finances" until she began working as a loan officer herself.

Gonzales's mother works in retail and her father for the airport, she said, and both encouraged her to pursue higher education. For her part, Gonzales now tries to inform others with student loans about what they're taking on and what their choices are.

"Anyone young I cross paths with, I try to educate them."

Can I set up a payment plan for my student loans?

Yes — payment plans are always available. Even so, some advocates encourage borrowers to wait for now, since there’s no financial penalty for nonpayment during the pause on payments and interest accrual.

Katherine Welbeck of the Student Borrower Protection Center recommends logging on to your account and making sure you know the name of your servicer, your due date and whether you’re enrolled in the best income-driven repayment plan.

What if I can't pay?

If your budget doesn’t allow you to resume payments, it’s important to know how to navigate the possibility of default and delinquency on a student loan. Both can hurt your credit rating, which would make you ineligible for additional aid.

If you’re in a short-term financial bind, according to Mayotte, you may qualify for deferment or forbearance — allowing you to temporarily suspend payment.

To determine whether deferment or forbearance are good options for you, you can contact your loan servicer. One thing to note: interest still accrues during deferment or forbearance. Both can also impact potential loan forgiveness options. Depending on the conditions of your deferment or forbearance, it may make sense to continue paying the interest during the payment suspension.

How can I reduce costs when paying off my student loans?

— If you sign up for automatic payments, the servicer takes a quarter of a percent off your interest rate, according to Mayotte.

— Income-driven repayment plans aren’t right for everyone. That said, if you know you will eventually qualify for forgiveness under the Public Service Loan Forgiveness program, it makes sense to make the lowest monthly payments possible, as the remainder of your debt will be cancelled once that decade of payments is complete.

— Reevaluate your monthly student loan repayment during tax season, when you already have all your financial information in front of you. "Can you afford to increase it? Or do you need to decrease it?" Mayotte said.

— Break up payments into whatever ways work best for you. You could consider two installments per month, instead of one large monthly sum.

Are student loans forgiven after 10 years?

If you’ve worked for a government agency or a nonprofit, the Public Service Loan Forgiveness program offers cancellation after 10 years of regular payments, and some income-driven repayment plans cancel the remainder of a borrower’s debt after 20 to 25 years.

Borrowers should make sure they’re signed up for the best possible income-driven repayment plan to qualify for these programs.

Borrowers who have been defrauded by for-profit colleges may also apply for borrower defense and receive relief.

These programs won’t be affected by the Supreme Court ruling.

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