When time to resume payments, what happens if you don’t?
NEW YORK » After three years, the pandemic-era freeze on federal student loan payments will end this fall and more than 40 million Americans will have to start making payments again under the terms of a debt ceiling deal approved by Congress.
Student loan interest will start accruing on Sept. 1 and payments will restart in October. That means tough decisions for many borrowers, especially those in already-difficult financial situations.
It might seem tempting, come autumn, to just continue not making payments, but the consequences can be severe, including a hit to your credit score and exclusion from future aid and 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.
Once the moratorium ends, borrowers who can’t or don’t pay risk delinquency 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 see whether you qualify by visiting the Federal Student Aid website.
If you’ve worked for a government agency or a nonprofit organization, you could also be eligible for the Public Service Loan Forgiveness Program, which forgives student debt after 10 years.
Delinquency consequences
Carolina Rodriguez, Director of the Education Debt Consumer Assistance Program at the Community Service Society of New York, emphasizes that anyone temporarily unemployed should be able to qualify for a $0 payment plan.
And many others qualify based on income and family size.
“The repercussions of falling into delinquency can be pretty severe,” Rodriguez said. “The federal government can administratively intercept tax refunds and garnish wages. And it can affect Social Security, retirement, and disability benefits. Does it make financial sense at that point? Probably not.”
Rodriguez says her organization always advises against deferment or forbearance except once a borrower has exhausted all other options. In the long term, those financial choices offer little benefit, as some loans will continue to accrue interest while 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, deferment 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 postpone payments without it being held against you, but interest does accrue. So you’re going to see your balance increase every month.”
The background
The U.S. Supreme Court has ruled that the Biden administration overstepped its authority in trying to cancel or reduce student loan debt, effectively killing the $400 billion plan, which would have canceled up to $20,000 in federal student loans for 43 million people.
Of those, 20 million would have had their remaining student debt erased completely.
The court held that the Biden administration overstepped its authority in trying to cancel or reduce student loans for millions of Americans, stating that the administration needs the endorsement of Congress before undertaking so costly a program.
The 6-3 decision, with conservative justices in the majority, also rejected arguments that a bipartisan 2003 law dealing with student loans provided the authority Biden claimed.
President Joe Biden announced a 12-month grace period to help borrowers who may struggle after payments restart.
Biden said borrowers can and should make payments during the first 12 months after payments resume, but that, if they don’t, they won’t be at risk of default and it won’t hurt their credit scores.
Biden not giving up
Separately, the administration plans to pursue student debt cancellation with a different legal justification than the one struck down by the Supreme Court.
The White House hopes to provide relief instead by using the Higher Education Act, a broad federal law that governs the student loan program. Exactly who will be eligible and how much will be canceled will be decided through a federal rule-making process. But that process can take months, or even longer, so this attempt at cancellation won’t come quickly.