It’s almost time to resume student loan payments in the US, failure to do so could cost you
More than 40 million Americans will have to start paying federal student loans again by the end of the summer under the terms of a debt ceiling agreement approved by Congress.
NEW YORK: After three years, the freeze on student loan payments during the pandemic era is coming to an end soon. Student loan interest begins September 1 and begins in October.
It may seem tempting to just stop paying, but the consequences can be serious, including a drain on your credit score and exclusion from future aid and benefits.
More than 40 million Americans will have to start paying federal student loans again by the end of the summer under the terms of a debt ceiling agreement approved by Congress.
Millions are also waiting to find out whether the Supreme Court will allow President Joe Biden’s student loan forgiveness plan. But payments will resume regardless of what judges decide.
That means tough decisions for many borrowers, especially those who find themselves in already tough financial situations.
Experts say default and bankruptcy should be the last resort, and that deferral and forbearance — which interrupt payments even though interest rates may continue to rise — are often better in the short term.
WHAT HAPPENS IF I DO NOT PAY A STUDENT LOAN?
Once the moratorium ends, borrowers who are unable or unwilling to pay risk falling behind and eventually defaulting. This can seriously damage your credit and make you ineligible for additional assistance and government benefits.
If you’re struggling to pay, advisors recommend checking first to see if you qualify for an income-driven installment plan, which determines your payments by looking at your expenses. You can determine this by visiting the Federal Student Aid website. If you worked for a government agency or a non-profit organization, you may also qualify for the Public Service Loan Forgiveness Program, which forgives student debt after 10 years.
Carolina Rodriguez, director of the Education Debt Consumer Assistance Program at the Community Service Society of New York, emphasizes that anyone who is temporarily unemployed should be able to qualify for a $0 payment plan. And many others qualify based on income and family size.
“The consequences of falling into delinquency can be quite serious,” Rodriguez said. “The federal government can administratively intercept tax refunds and garnish wages. And it could impact Social Security, pensions, and disability benefits. Does it make financial sense at the time? Probably not.”
Rodriguez says her organization always advises against deferral or forbearance, unless a borrower has exhausted all other options. In the long run, those financial choices offer little benefit, as some loans continue to accrue interest while being deferred.
Abby Shafroth, senior attorney and director of the Student Loan Borrower Assistance Project at the National Consumer Law Center, said that of the two, deferral is generally a better option.
That’s because 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.
“Forbearance allows you to defer payments without it being held against you, but interest accrues. So you will see your balance increase every month.
WHAT ABOUT DECLARING BANKRUPTCY?
For most student loan borrowers, it is still very difficult to get your loans forgiven or canceled due to bankruptcy. Borrowers must prove a very harsh standard of financial condition called “unjustified hardship”.
“That doesn’t mean people shouldn’t look at it,” Rodriguez said. “But they may fail to pay off their loans.”
For borrowers who show that level of financial strain, chances are they have other options, Rodriguez said.
She advises borrowers to make sure they speak with a bankruptcy attorney who understands student loan bankruptcy, which requires a different procedure than other types of bankruptcy.
Shafroth, of the NCLC, says new guidelines on student loan bankruptcy have emerged in recent years.
“While it is difficult to lose your loans through the bankruptcy process, more and more borrowers are eligible to lose their loans that way,” she said. “A lot of people write that off as ‘there’s no way,’ it’s impossible.” But more and more is possible.”
WHAT HAPPENS WHEN A LOAN GOES IN WARNING?
When you are 270 days behind on a loan — about 9 months — the loan appears on your credit report as defaulted.
“At that point, it’s not just behind, it’s in collections,” Shafroth said. ‘Then you are no longer eligible for a new federal student grant. Many people go into default because they were unable to complete their studies the first time. This prevents them from going back to school.”
Once a loan is in default, it is subject to the collection procedures mentioned above. That means the government can garnish wages (without a court order) to repay the loan, intercept tax refunds, and seize portions of Social Security checks and other benefits.
WHAT ARE OTHER OPTIONS IF I CANNOT PAY?
Shafroth said many borrowers may still qualify for loan forgiveness through a patchwork of programs outside of the Biden administration’s proposed debt relief program.
“If your school closes before you complete your program, you are eligible for an exemption. If your school lied to you or misrepresented the outcome of your enrollment, you can file a defense with the borrower and request that your loan be stopped on that basis,” she said. “If you have a disability, you can sometimes have your loans stopped on that basis.”
Shafroth encourages borrowers to look at the Student Aid website to see what their options are before missing payments.
WHAT IF MY LOANS ARE IN WARNING BEFORE MARCH 2020?
Under the Biden administration’s Fresh Start program, borrowers with federal student loans that defaulted before the break will have a chance to get current.
Borrowers who were in default will not be subject to collections or wage garnishment until about August 2024, or about a year after the end of the payment freeze. These borrowers have also been allowed to reapply for federal student loans, to earn degrees. Finally, these defaulted loans are now reported as current to credit bureaus.
That said, borrowers need to take action if they don’t want to default after this one-year leniency period ends.
To remove your default record, you must contact the Education Department’s Default Resolution Group online, by phone, or by mail and request that the group remove the loans from default through the Fresh Start policy. Within four to six weeks, any record of default will be removed from your credit report and the loans will be placed with a loan manager. This also gives you access to means-tested repayment plans and government loan forgiveness, if applicable.
WHAT IF I WERE BACK IN PAYMENTS OR BACK BEFORE MARCH 2020?
The Fresh Start program also applies to borrowers who were in arrears prior to the payment break. Those bills are considered current and borrowers have the option to enroll in means-tested repayment plans that can reduce the bills to as little as $0, or to file for deferment, deferment, or bankruptcy.