One thing you ‘won’t have to worry’ about when student loan payments restart

It’s essential that you repay your student loans to avoid incurring additional debt from interest, docking your credit score and negatively impacting your general financial profile and creditworthiness. Even during bankruptcy, student loans are rarely discharged, so it’s imperative to stay on top of payments and not rely on the possibility of having the loan forgiven, pros say.

But we have a glimmer of good news: Federal student loan borrowers get a 12-month “on-ramp” that kicks in automatically if they don’t resume payments right away. “That means that until October 2024, borrowers who don’t pay won’t have to worry about delinquency, default, credit score hits or going to debt collections. However, during that time, interest will accrue on your loans so it’s best to resume payments if you can,” says Kimberly Palmer, personal finance expert at NerdWallet.

But, Palmer explains, when that on-ramp expires, the consequences of not paying become more severe. “You could potentially face delinquency, default, a tanked credit score and ineligibility for further federal student aid. Collections could garnish your tax refunds, social security benefits and wages,” says Palmer. 

In short, get on repaying ASAP. Here’s how: 

Figure out your loan servicer, what you owe, and how you can pay — ASAP.

A lot has changed loan-wise over the last three-and-a-half years. “Your loan might have been sold to a different servicer. NerdWallet recently found in a study on student loans that 46% of federal student loan borrowers don’t know how much student loan debt they currently have and 57% don’t know who their loan servicer is,” says Palmer. 

To find out who your loan servicer is, log into the Federal Student Aid site and view your dashboard for all pertinent loan information including how much you owe and when payments are due.

Understand what you can pay – and budget accordingly.

Mark Kantrowitz, student loan expert and author of How to Appeal for More College Financial Aid, says, if your student loan debt at graduation is less than your annual income, you should be able to afford to repay your student loans in ten years or less. 

“Average student loan debt at graduation for a Bachelor’s degree is $30,368 with 60.8% of Bachelor’s degree recipients graduating with debt, based on the 2019-2020 National Postsecondary StudentAid Student,” says Kantrowitz. Meanwhile, the National Association of Colleges and Employers (NACE) reveals the starting salary for the class of 2021 was $55,911. “Most Bachelor’s degree recipients will be able to repay their student loans. If there’s a problem, it’s due to other expenses, not the student loans. Or it involves people who took on debt for graduate school or people who dropped out of college. They have the debt but not the degree that can help them repay the debt,” says Kantrowitz.

To budget for student loan payments, Marketwatch Picks highlighted the number 1 thing borrowers should do now, in anticipation of repayment beginning. There are also 6 things student loan borrowers should consider before payments become due in October.

Pay at least the minimum due — and if you can’t, ask for a different repayment option.

As far as the rules regarding repaying student loans, experts advise paying at least the minimum amount due. “If you can’t afford to do that, reach out to your student loan servicer to work out a new repayment plan or if you really need to, ask for a pause on your repayment,” says Michael Kitchen, managing editor of student loans at LendingTree.

There are many programs available to help borrowers repay student loans or have them forgiven altogether. “One of the most well known is the Public Service Loan Forgiveness (PSLF) plan for nonprofit or government employees. Others are run by states, usually for specific professions like medical professionals, lawyers and teachers and if you qualify, they’ll pay some of your student debt in exchange for your agreeing to work in a high-need area,” says Kitchen.

Getting familiar with all programs offered is a good place to start. “If your income is low enough, you can get $0 payments by signing up for the new income-driven repayment plan called SAVE. If you’re on this plan, interest won’t build up and you’ll get credit towards IDR forgiveness, even if you get $0 bills, which is not the case for the on-ramp,” says Palmer.

And though this is far down the road, borrowers should also be aware of the instances in which loans may be forgiven. “If you’re in an income-based plan with low income, the remainder of your debt is forgiven after 20 years. The balance is taxable to you, but the debt is resolved. If you work in the public service sector, your debt is forgiven after 10 years and it’s tax-free to boot! If a borrower becomes permanently disabled or dies, your loans are forgiven. They do not pass on to next of kin,” says Michael Genneway, LPL-affiliated financial adviser and program manager at SoCal Wealth Management.

Sign up for autopay.

One thing you can do to minimize the impact of impending student loan payments is sign up for autopay. “The monthly payment amount is automatically transferred from your bank account to the lender and you’ll qualify for a 0.25% percentage point interest rate reduction,” says Kantrowitz.

Get smart about student loans and your taxes.

Claim the student loan interest deduction on your federal income tax returns. Up to $2,500 in interest paid on federal and private student loans can be excluded from income and you can claim the student loan interest deduction even if you don’t itemize,” says Kantrowitz.

Do what you can to avoid missing payments.

Something you’ll want to avoid at all costs is missing payments. “Missing payments harms your credit score, so on-time payments are vital for a positive credit history. Delinquent student loans can affect your ability to make major purchases like cars and homes,” says Dr. Anthony L. Williams, LPL-affiliated financial adviser and co-founder of Galene Financial.

A critical thing to note about Federal student loans is that there’s no statute of limitations. “Meaning, a lender has an unlimited amount of time to take legal action against a defaulted borrower. Typically, with most other debts, lenders only have a certain period of time that they can pursue legal action in order to collect on a defaulted loan which is protected under the statute of limitations,” says Courtney Alev, consumer financial advocate at Credit Karma.

Keep in mind that aside from engaging in a payment plan that includes loan forgiveness, student loans are almost impossible to discharge, even in bankruptcy. “You have to demonstrate that repaying the loans will impose undue hardship on the borrower and the borrower’s dependents, which typically means you can’t maintain a minimal standard of living while repaying their loans currently and throughout most of the life of the loans, and that you’ve made a good faith effort to use the financial relief available to you, such as deferments, forbearances, extended repayment and income-driven repayment plans,” says Kantrowitz.