Student loan payments are resuming soon. But many Americans are not ready.
In fact, according to a survey in 2022,
30 percent of adults said they probably couldn’t afford student loan payments when they resumed. And a further 28 percent said “no, definitely not.”
And while there are proposals to forgive student loans being legislated in court, the reality is that many borrowers need to prepare for student loan payments to resume in 2023.
We’ll review the current state of the student loan moratorium, when exactly payments will resume, how the current economy can affect student loans, and steps you can take to prepare (including alternative options to consider, such as refinancing).
What is the current state of student loan forgiveness?
Federal student loan payments were paused back in March 2020 as part of the CARES relief package during the height of the pandemic. This moratorium was initially a one-time pause on payments while the nation grappled with lockdowns and the fallout of the global pandemic. But prior to expiration, the moratorium has been extended several times over the past few years.
In addition to the moratorium, in August 2022, the Biden Administration announced a proposal to forgive up to $10,000 in student loans (and up to $20,000 in forgiveness for Pell Grant recipients) for borrowers with earnings less than $125,000/year (or $250,000/year if married filing a joint return). This proposal was eventually blocked by a federal court and is currently on hold.
While the student loan debt proposal is being litigated, the loan moratorium will continue, but could be lifted as soon as a decision is made. Payments will resume 60 days after the moratorium ends, or 60 days after the June 30, 2023 deadline.
With student loan forgiveness on hold, and the prospect of student loan payments resuming by the middle of 2023, you need a plan in place to handle the new payment requirements.
How the current economy affects your student loans
There are several factors right now that make this a less-than-ideal time for student loan payments to resume:
- Debt ceiling. The government is at risk of a shutdown (again), and paused student loan payments are halting billions of dollars from funding the government currently. And forgiving student loans would be costly; with a stalemate in the House of Representatives over the debt ceiling, further budget cuts to the Department of Education could make student loan forgiveness even more challenging to gain funding for.
- High interest rates. With interest rates rising at historic rates, this is bad news for borrowers with a variable interest rate. Payments will be much higher for private student loan holders vs. those with fixed-interest-rate federal loans. And refinancing your loans may land you a much higher rate (and payment), even with federal loans.
- Inflation. In 2022, inflation soared at a historic pace, making everything from housing, to gas, to eggs much more expensive. And even worse, manufacturers are actually giving you less for more, as "shrinkflation" is hitting store shelves on many items. Tightening household budgets means less money available for student loan payments once they resume.
- Moratorium ending. With the pause on payments ending for federal student loan borrowers, many borrowers won’t be able to afford the newly reinstated payments.
- Student loans forgiveness on hold. While there was hope of lower balances and payments with the student loan forgiveness proposal, borrowers need to be prepared to pay the full balance of their loans for the time being.
This perfect storm of factors may catch many borrowers off guard, so it's important to prepare for the worst, while still hoping for relief to come.
How to prepare and plan for a lower payment
While the combination of high rates, un-pausing of payments, and legislators making it difficult to pass student loan forgiveness policy makes it daunting to be a borrower right now, there are several things you can do to prepare:
Protect your credit score
Missing student loan payments can instantly hurt your credit score, making it harder to refinance later. Make minimum payments on time, or work directly with your lender to set up a payment plan that works.
Consider Income-Driven Repayment (IBR)
IBR plans offer lower payments based on your current income, and can help you afford payments when they resume.
While rates are high right now, if your payment terms are not great, you may consider refinancing your loans to free up some cash in your monthly budget. As always, review the details of any refinance offer to make sure it makes sense for your finances.
Make a (future) budget
Create a budget that includes your monthly student loan payment to see if you can make it work. Start living on that budget NOW and set aside the payment in a savings account.
Increase your income
While it may seem impossible to simply earn more, you can start a side hustle, do freelance work, or apply for a new job to increase your income. This can help protect you from the increased expenses of loan payments coming up.
Boost your savings
With an uncertain economy and limited prospects of loan forgiveness, having a healthy savings account can help you handle the student loan payments and other financial disasters.
Pay down the most expensive debt first
While payments are paused, you can pay down more principal on your federal student loans. Pay down your most expensive loan first, letting you pay it off faster, and free up more money in your monthly budget.
There are several policies being debated over the future of federal student loans, but don’t wait to prepare for the worst. It’s important to be financially able to pay your student loan payments, or to time alternative options to find a payment plan that will work with your monthly budget.
While there are certainly economic factors working against you at the moment, you can put yourself in a solid position to afford student loan payments by taking the action steps outlined above.
How to Find Your Loans and Loan Servicers
To find a list of your federal student loans and the servicers for each, log in to Studebtaid.gov and look under “My Aid.” This will give you a list of current and past loans, including repayment terms, loan history, and loan servicers. All federal student loans can be reviewed here, including Direct loans, Family Educations Loans (FFELP), and Perkins loans.
When Do Student Loan Payments Resume?
Student loan payments resume 60 days after the end of the moratorium. This will happen as soon as the student loan forgiveness legislation is decided on in the Supreme Court, or on June 30, 2023. This means that payments will most likely resume by late summer / early fall of 2023 at the latest.
Can My Student Loans Be Forgiven if I Consolidated?
Yes, but it’s complicated for students with FFELP loans.
While Direct Loans are government-held federal student loans (and fully qualify for forgiveness under Biden’s proposal), FFELP loans may be held by private, commercial companies.
According to new Biden Administration initiatives, forgiveness may require consolidating your FFELP loans into the Direct Loans program, but you must have completed the consolidation before September 22, 2023.
And while there are new rules to help Direct Loans borrowers qualify for Public Student Loans Forgiveness programs, FFELP loan holders do not qualify…at all.
Like I said…it’s complicated. Check with your loan servicer to see if you qualify for any forgiveness programs.
Can I Get Student Loan Forgiveness on Private Loans?
Very few private lenders offer student loan forgiveness programs. Unfortunately, the only real option is forgiveness after death or permanent disability, and these policies are up to each individual lender. And co-signers may still be responsible even if the primary borrower dies.