One of the very few good moments of 2020 (besides the release of Tiger King, of course) was when federal student loans were put in an interest-free moratorium after the CARES Act was approved.
The original plan was for payments to restart in September 2020…but that didn’t happen. Instead, we got lucky with several extensions.
Now – after almost two years of moratorium bliss – the time has come. Student loan payments will resume after January 31st, 2022.
If you’ve been avoiding your federal loans up until now, that means it’s time to get ready for what’s coming.
Why you should take action now
Dealing with student loans isn’t exactly everyone’s idea of fun, but ignoring your student loan debt won’t do you any favors, either. In fact, that’s basically a recipe for disaster, as you could end up missing a payment.
While lenders typically wait 90 days to report late or missed payments to the credit bureaus, once they do, your loan becomes delinquent. If that happens, your credit score will take a hit, making it harder for you to access credit in the future.
The worst part?
It takes up to seven years for delinquencies to fall off your credit report.
You don’t want a tiny mistake like a missed student loan payment to haunt you for years to come. That’s why it’s so important for all federal student loan borrowers to take control of their loans early on and make a plan for student loan repayment.
How to prepare yourself for restarting payments
Coming up with the right game plan to tackle your upcoming payments may seem intimidating, but it’s actually easier than you think.
I’ve consulted Megan Walter, a policy analyst at the National Association of Student Financial Aid Administrators (NASFAA), and Amy Lynn Richardson, senior manager and financial planner of Centralized Planning Group at Charles Schwab, to come up with an order of operations to help you (and me) get ready for when repayment starts.
Make sure all of your contact info is up to date
You may think it’s not that big of a deal if your student loan servicer has the wrong phone number or your old email address, but it’s super important that they can get a hold of you as quickly as possible if they need to.
Because you don’t want to miss any important updates regarding your student loan accounts, including whether your payment amount has changed or if you have a new due date.
Additionally, if you were previously enrolled in automatic payments, the office of Federal Student Aid announced that servicers will have to contact you to confirm whether or not you want to continue with this arrangement. If they can’t reach you, auto-debit may be suspended, which may cause you to miss a payment.
How to update your contact info
You can update your contact information at any time by logging into your StudentAid.gov account and changing the information on your profile. You can also do this by contacting your student loan servicer by phone, email, or by logging into your account with them.
Get in touch with your student loan servicer ASAP
Many of us dread contacting our student loan servicer, simply because we’re irrationally afraid that this will lead to an unpleasant convo. But contacting your servicer is key to developing a good repayment strategy.
Here are some of the things you should find out from your servicer to create the perfect plan:
- When payments will restart for you. Although payments are set to restart after January 31st, 2022, each servicer handles their due dates differently. So, make sure to contact yours to know exactly when your payments will be due.
- Your current payment amount. This will help you to determine whether you’re prepared to start repaying your loans, or if you need to make any changes to your budget or apply for a different repayment plan.
- If you need to recertify your income-driven repayment plan (if you were already enrolled, of course). Since payments have been suspended for almost two years, you may have missed your recertification date (aka the date by which you need to submit your proof of income), which may cause your payments to increase.
Walter, from NASFAA, also recommends that every student loan borrower contacts their servicer as soon as possible, “as they will probably be harder to get a hold of once repayment starts and more people are scrambling to get answers.”
Recalibrate your budget
Without student loans in the picture (at least temporarily), it’s possible that you slowly but surely compromised the portion of your income that was originally designated for your loans.
So, in order to prepare yourself for your upcoming payments, Richardson, from Charles Schwab, says you need to sit down and crunch some numbers, and get rid of any unnecessary expenses, if need be.
“Take this opportunity to understand your entire financial situation – not just your student loans. can’t answer questions around student loans without understanding a total picture of our finances, including goals, other debts, and cash flow.”
Once you have assessed your financial situation as a whole, then Richardson says it’s time to create a budget – which includes your loan payments – and try to stick to it as much as you can.
“In this case, creating a plan can lessen the stress and anxiety that comes with managing any kind of debt.”
Read more: What Does A Realistic Budget Look Like?
See if your current repayment plan makes sense
If you recently lost your job, are earning less than before payments were suspended, got married, had kids, or experienced another life-changing event that has altered your finances, it’s time to see if your current repayment plan still makes sense.
To do this, Walter recommends using StudentAid.gov’s Loan Simulator, which is 100% free.
The Loan Simulator uses your actual federal student loan balance along with your income, family size, and state of residency, among other details, to help you determine which repayment plan best suits your financial needs.
Walter also says that using this tool “can help students decide if consolidating their student loans is a good choice based on their situation.”
What if you’re still unable to afford your payments?
If after making any and every budget adjustment you can think of, you still can’t afford your monthly bill, here are three options you can explore.
Look into income-driven repayment plans
One of the best parts about having federal student loans instead of private student loans is that you have access to flexible repayment options, including income-driven repayment plans.
Income-driven repayment plans are designed to make your debt more manageable by adjusting your monthly payment to a percentage of your income.
On the downside, these plans must be recertified each year for you to retain eligibility, but the good news is that your loan payments could be as low as $0, depending on how much you earn.
To apply for an income-driven repayment plan, you must log in to your StudentAid.gov account, fill out the form, and submit copies of your two most recent pay stubs or tax returns to your student loan servicer. This last part can usually be done online on your servicer’s website.
Read more: Income-Based Repayment: Should You Do It?
Consider loan consolidation
When you consolidate your loans, you’re essentially bundling them into one big loan, and (possibly) extending your loan repayment term.
The interest rate on this “new” loan will be the weighted average of the interest rates of the loans you’re looking to consolidate, rounded up to the nearest one-eighth of one percent, and is fixed for the life of the loan.
This longer repayment term along with the weighted average of the interest rates is what can substantially reduce your monthly payment.
The best part?
You can also apply for an income-driven repayment plan once you’ve consolidated your loans, which can further lower your monthly bill.
However, Walter says that consolidation should be looked into carefully as:
“extending the payment period to 30 years, means you’ll pay more over the life of the loan.”
She also points out that if you have any outstanding interest on your loans before consolidation, “that interest now becomes part of the principal of your loan debt, meaning your interest will now be accruing on a higher balance than previously.”
Apply for short-term student loan relief
If you’re just going through a rough patch, and foresee your financial situation improving within a month or two, then calling your servicer and asking them to put your loans in short-term forbearance or deferment may be the better option.
Both forbearance and deferment allow you to temporarily pause your payments, without being penalized.
However, there are some drawbacks. One of them is that interest will continue to accrue (aka grow and accumulate) while federal student loans are paused. Besides that, your student loan forgiveness options may also be affected. That’s why Walter stresses that loan forgiveness shouldn’t be used as long-term repayment strategies, only as “temporary stop-gaps to keep you from defaulting.”
If you forgot all about your student loans’ existence while payments were suspended – you’re not alone. However, the time has come: .
The most important thing is to be proactive, and to take a look at both your student debt and your current finances to come up with a holistic plan that works for you.