The student loan pause is coming to an end. Do you have a plan for repayment?
If you're wondering how to manage student loan payments following the payment pause, you're not alone. We've got some ideas to help.
If you have student loans, it's important to know that the three-year pause on payments is coming to an end. It's a good idea to start preparing for your loan payments to resume and to create a plan for long-term student loan repayment.
Key Overview
The student loan pause temporarily froze interest from accruing and payments from coming due on federal student loans due to the financial impact of the Covid-19 pandemic
Borrowers will need to resume making payments in late 2023 as the pause comes to an end
The pause will end on August 29 and interest charges will resume at this time
Student loan servicers will then send bills giving borrowers a reasonable amount of time to begin making payments, meaning your next bill will likely be due around October 2023
Borrowers who are currently in default will have an extra year before deciding how to handle their situation due to the Fresh Start program
When is the student loan pause ending?
The student loan pause is set to end 60 days after June 30, which is August 29. Since March 2020, interest rates for government-held federal student loans have been at zero percent. However, starting August 29, interest will begin accruing again.
If you have a federal student loan, your interest rate is likely fixed based on Congress' constraints at the time of disbursement. This means that for most borrowers, interest rates will return to their pre-pause rates. This pause went into effect three years ago, but don't worry - you can find out your rate by checking your loan documentation.
If you're worried about having to make student loan payments again after the pause ends on August 29, don't worry. The Education Department's student loan servicing system needs to generate billing statements and send them to borrowers first. Then, you'll have enough time to make your first payment. So, you don't need to stress about payments right away.
Borrowers in default will still have more time to fix their situations before collections resume. The Fresh Start program, created by the Biden administration, was designed to offer a way out of default on federal student loans. It may even count recent periods of default towards eventual loan forgiveness. Fresh Start will be available for one year after the payment pause ends, giving defaulted borrowers relief from collections efforts.
What is the student loan payment pause?
In March 2020, former President Donald Trump offered financial relief for individuals with federal student loans due to the Covid-19 pandemic by pausing payments and interest. Both Trump and current President Joe Biden both renewed the program several times, saving students and graduates hundreds each month in student loan payments. Efforts to enact permanent loan forgiveness for many Americans with federal loans failed earlier this year, and President Biden can no longer renew the existing pause because we are no longer in an emergency state.
How do federal student loans work?
The federal student loan program provided by the U.S. Department of Education is known as the William D. Ford Federal Direct Loan Program, or simply “Direct Loans.” This program is a great option for students who are in need of assistance funding their college studies since it provides them with access to four different types of loans.
The first type of loan available through this program is the Direct Subsidized Loan, which is specifically designed for undergraduate students who demonstrate financial need to help cover all costs related to higher education. These loans are subsidized by the government, meaning that the interest rate charged is lower than other private loans, and they also do not require repayment until 6-9 months after you have graduated or left college.
The second type of loan offered through this program is the Direct Unsubsidized Loan; these do not require that you demonstrate financial need and can be used for both undergraduate and graduate studies. Interest does start accruing when you take out these loans, but repayment may be deferred until after you graduate from college. Both of these types of loans have annual limit amounts that you will need to keep in mind while applying for federal student aid.
PLUS Loans are loans made to graduate or professional students and parents of dependent undergraduate students. Consolidation Loans allow borrowers who have one or more other existing federal student loans to combine them into a single loan with a single monthly payment. Regardless of whether you have met specific eligibility requirements for any of these options, all students should carefully consider the terms and conditions of their own particular situation when considering whether Direct Loan programs are suitable options for managing their educational finances.
How to prepare for payments to restart on a student loan
Paying off student loans can be a challenging task, but it is one of the most important investments you can make in your future. On average, it takes federal student loan borrowers 10 years to pay off their debt under the standard repayment schedule, although alternative plans are available for up to 30 years of repayment. Private student loan terms vary by lender with different repayment periods ranging from 5-20 years. Shorter loan terms typically come with lower interest rates and faster repayment will result in less paid out over time.
Use a HELOC to consolidate student loan debt
For homeowners who have built up equity but still carry a chunk of debt in the form of student loans, a home equity loan or home equity line of credit could be a helpful tool for consolidating debt into one payment. Using a home equity line of credit (HELOC) to pay off student loan debt could be a very attractive option for some people.
However, this strategy comes with its risks. Since the HELOC is secured by your house, you are putting your property at risk should you suddenly experience financial hardship that prevents you from repaying the debt. Additionally, some federal student loans offer deferment and loan forbearance if needed; using a HELOC to pay off these loans can eliminate those beneficial protections that come with federal loans. Therefore, it is important to fully understand all the potential costs and benefits before deciding to use a HELOC in order to pay off student loan debt.
The takeaway
The end of the student loan pause offers borrowers a chance to re-evaluate their financial situation and plan ahead for repayment. It is important to create a budget that will help you make informed decisions about how much you can afford to pay on your student loans each month. Additionally, if you are having difficulty managing your payments, there are options such as refinancing or consolidation that can help reduce your monthly payments and interest rate. No matter what strategy you decide to use, it is essential to stay informed and knowledgeable in order to best manage your finances during this period of transition.
