Student loan borrowers have enjoyed a reprieve from their college debt since the pandemic — but they’re running on borrowed time. A three-year freeze on student loan repayments is set to expire at the end of August — interest starts accumulating again in September and payments resume in October — and the Supreme Court recently dashed the dream of permanent relief that President Joe Biden hoped to achieve.
A new GOBankingRates survey of more than 1,000 adults found that almost half the country has outstanding loans — and nearly one in three won’t be able to keep up with their bills if they have to restart their payments this fall.
While they’re running out of days, there’s still time to prepare for the inevitable — and the remainder of the summer doesn’t have to be a countdown to disaster.
If you’re a borrower struggling with student debt, no one could blame you for feeling bitter and deceived. After all, you had the dream of relief dangled in front of you only to be snatched away.
“It’s almost like a rotten trick the way the government promised a certain amount of student loan forgiveness,” said Richard Barrington, a financial analyst with Credit Sesame. “That and the repeated extensions of the student loan repayment pause may have created some unrealistic expectations.” Unfortunately, reality is that student loans will be resuming.
The study found that many student borrowers will face some very unattractive options come fall.
- One in four will have to dip into their savings to restart their loan payments.
- Nearly one in five will have to raid a retirement account.
- About 25% expect to overdraw their accounts.
- More than four in 10 will have to tighten their spending.
- More than 21% will take on new debt to cover their outstanding debt.
- About 16% will simply miss their payments — and that might be the worst outcome of all.
“Failure to keep up with payments can have consequences for years to come,” Barrington said. “Besides damaging your ability to get credit, they could even impact your ability to get a job or an apartment. Don’t turn trouble with student loan payments into an even bigger problem.”
After three years on the back burner, your loans might feel like a hazy memory that you’d just as soon see fade away into oblivion. Unfortunately, you don’t have that luxury — it’s time to get back up to speed.
“Check with your student loan servicer and re-familiarize yourself with your payment schedule,” Barrington said. “In particular, some of the details about how to make payments may have changed. Don’t wait until the last minute to find you’re surprised by what you owe each month, when it’s due and where to send it.”
Once you refamiliarize yourself with your monthly student loans, it’s time to factor your payment into your budget, presuming you’ve been following one. If not, now is, without a doubt, the time to start.
“Even if you’ve gotten by without a formal budget before, this new financial challenge may make some detailed planning essential,” Barrington said. “List all your expenses, and if your income can’t cover them all, decide which are absolutely necessary, which are most important to you and which you could do without if necessary. These can be hard choices, but budgeting empowers you to make those decisions for yourself. If you don’t do this kind of budgeting upfront, you may have to make unwanted choices when you suddenly find yourself short of money.”
Don’t Make Payments Yet, but Get In the Habit
Don’t actually give your lender any money until you have to, but start setting your upcoming payments aside every month to get into a routine and stress test your new budget.
“One of the first steps is to refrain from making any payments until the pause has officially ended,” said James Allen, certified financial education instructor, financial advisor, certified public accountant and founder of Billpin. “Instead, deposit what you would have paid into a savings account. This way, you’re still maintaining the habit of making payments, but you’re also earning a bit of interest.”
Barrington agrees and thinks borrowers should treat the next few months as a dress rehearsal for their new post-freeze spending plan.
“This will give you some experience living with your budget and alert you to any pinch points,” he said. “Also, the money you set aside between now and then will give you a little cushion to help you through adapting to the new payments.”
If you don’t think you earn enough to repay your loans, you might be able to work that to your advantage.
“Income-driven repayment plans can be a lifeline for those struggling to meet their monthly obligations,” Allen said. “These plans set your monthly student loan payment at an amount that is intended to be affordable based on your income and family size. If your income is low enough, your payment could be as low as $0 per month.”
Qualifying for such a plan could be easier than you might think.
“Most federally-backed loans are eligible for some form of income-driven repayment plan,” Barrington said. “The specific type of plan you are eligible for depends on your circumstances. Depending on the plan, this could be between 10% and 20% of your discretionary income.”
Barrington explained that for the purposes of income-driven repayment plans, discretionary income is based on the difference between how much you make and the poverty rate in your area.
“So, your payments should actually be less than 10% and 20%,” he said. “One catch is that a lower monthly payment could take you longer to pay back your loan, resulting in you owing more interest. However, as a way to make monthly payments affordable, it’s a great option. In order to get your payment reduced according to your income, you need to apply for the program. Don’t wait to do this. The sooner you apply, the sooner you can benefit from a reduced payment.”
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