If you’re one of the 43.6 million borrowers whose federal student loans were paused during the pandemic, you’ll need to start paying again in October — whether you’ve been out of school for a decade or you just graduated last year.
Student loans can be a budget burden, but thankfully, there are ways to soften the financial blow and successfully adjust your financial life — we’ve got the scoop from experts on everything you need to know before repayment starts.
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Is There Any Leeway On Student Loan Payments Resuming?
You might have heard there’s a “grace period” or “on-ramp” for those starting to repay again. It’’s important that you understand exactly what that means.
“Even though there’s a 12 month on-ramp, all that is doing is suspending negative reporting to collection agencies and credit bureaus,” explains college financial expert Mark Kantrowitz. “When the 12 month period is over, if you haven’t made any payments, you’re gonna have to get caught up, or your loans will be delinquent or even in default.”
In other words, the grace period is a safety net — interest will still accrue during this time, so it’s not an excuse to simply not pay for the next year. It’s merely there to ensure that a missed payment mistake doesn’t damage your credit, which could have a lasting impact on your financial life long-term.
What Action Steps Do I Need To Take When Student Loan Payments Resume?
The first item on every borrower’s to-do list once student loan payments resume should be going to the Federal Student Aid website. There, you’ll be able to access information like what types of loans you have, who the servicer is, your loan balance, and your interest rate.
Next, Certified College Financial Consultant Rebecca Baldauf suggests borrowers may want to look into consolidating their federal loans to simplify the repayment process and ensure they remain eligible for opportunities like income-driven repayment and debt forgiveness in the future. You might also lower your monthly payments in the process. Consolidating your loans is exactly what it sounds like — you combine one or more federal loans into a single Direct Consolidation Loan. You can learn more about it here.
That said, it’s important not to confuse federal loan consolidation with privately refinancing your loans. “We generally do not recommend that people refinance their loans, because it takes away any opportunity for forgiveness or federal benefits that would be offered associated with student loans,” Baldauf says.
Once you’ve taken a look at all your loans and consolidated them if you need to, it’s time to determine your monthly payment — and figure out how to pay it.
“Do a descriptive budgeting exercise where you track all your spending for a month, and assign everything to a broad category,” Kantrowitz suggests. “You would also tag everything as either being mandatory (a need) or discretionary (a want), and then total everything up at the end of the month.”
Take a look at where you stand, and use some of our favorite budgeting tips to work in your new line item for student loan repayment. If you find you don’t have enough wiggle room in your budget to make it work — even after back on discretionary spending as much as you can — then it’s time to think about other solutions.
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Can I Lower My Monthly Payment?
Borrowers carry an average federal student loan debt of more than $37,000 — but the standard student loan repayment timeline is 10 years. For many, that might equate to a monthly payment that’s too high. If you feel like your student loans are affecting your ability to pay rent or otherwise live your life, Baldauf recommends looking into income-driven repayment programs, or IDRs, to reduce your monthly payment.
The new Saving on a Valuable Education Plan, or SAVE Plan, recently established by the Biden administration, helps borrowers in a number of ways that other income-driven repayment plans haven’t. The biggest benefit is that SAVE increases the income exemption to 225% of the federal poverty line, so if you earn less than $32,800 a year, your monthly payment will be zero. It also eliminates remaining interest after a payment is made, excludes spousal income, and even allows for earlier forgiveness in some cases.
“If you had $12,000 or less in debt, you can have your remaining debt forgiven after 10 years instead of the 20 or 25 years,” Kantrowitz explains. “Each additional $1,000 of debt adds a year.”
Another advantage SAVE is that your payment is calculated based only on your taxable income, not your gross income — so pre-tax employer benefits like health insurance and retirement contributions can only help you. (Cha-ching, more incentive to save for retirement, we love it!)
“People have a tendency to put their retirement savings off, not recognizing that with a lot of employer sponsored plans, like 401(k)s or 403(b)s, you can actually contribute up to $22,500 per year and it directly reduces the income that they utilize to calculate your monthly payment,” Baldauf says. “This helps from a financial future perspective, and it reduces your taxable income [in the here and now.]”
Kantrowitz adds that if you feel your financial hardship may be temporary, you may want to consider pausing your payments via deferment or forbearance until you can get back on your feet. Ultimately, the goal is to pay the least amount of interest over the long run, so you’ll want to avoid an extended repayment plan if you can.
Once you decide whether the SAVE plan works for you, you can fill out the income-driven repayment form on studentaid.gov to see what your lowest monthly payment could be. Then, Kantrowitz recommends contacting your loan servicer and setting up automatic payments — there’s usually a small interest rate reduction when you do!
The Bottom Line
The resuming of student loan payments can feel overwhelming — especially if you’re a recent grad who is new to repayment, or if you have lingering financial struggles from the pandemic. But it is possible to pay off your loans with a little smart budgeting.
Helping people get on track with a budget that works for them is exactly why HerMoney started FinanceFixx, an 8-week program designed to help you feel more empowered with your money, and more confident with all things finance. If you’re ready to set realistic goals to pay off your loans, we’d love for you to join us!