Even before the pandemic, student loan debt was a stressful issue for students and a blow to the economy. An unpredictable year made the situation worse.
To start thinking positively and understand the options borrowers have, we spoke with 10 student loan debt experts about what borrowers should know in the new year. They explained how to handle student debt after the pandemic, what happens if you default, and more.
The end of suspended payments
Originally, the CARES Act paused student loan payments from March 13 until the end of September. That pause has since been extended until January 31 and may be pushed back even further under President Biden. Unfortunately, many Americans are still struggling with their finances and may still have trouble making payments at the start of 2021. Fortunately, your federal loans have not been accruing interest. The interest rate was cut to zero percent when the payment pause was implemented. When those bills come back, you’ll want to be financially prepared.
A note on different types of loans
There are several different kinds of student loans, but the most common are Federal Direct. Private student loans are also common because Federal Direct Loans must be converted to private loans to be refinanced. Additionally, private loans can be taken out by those who don’t qualify for federal aid. Federal and private loans are treated very differently. Usually, private loan borrowers get the short end of the stick – they don’t qualify for any federal repayment plans or federal consolidation programs. They also can’t be granted forgiveness. Unfortunately, this means that many of the solutions here won’t apply to private loans.
What to do if you still can’t afford payments
Depending on the type of loans you have, you have many options for rearranging repayment to better fit your needs. The most important program is income-driven repayment.
EXPERT: Barbara Thomas – Education Loan Finance
The economic fallout caused by the pandemic has left many Americans in a challenging financial position. While the federal Direct Loan payment suspensions of the CARES Act provided much-needed financial relief during this time, unfortunately, some may find themselves in a position where making federal student Direct Loan payments come February will still be difficult. These borrowers, who are finding it difficult to make their student loan payments, may want to consider several options available through the federal student loan programs, such as income-driven repayment plans. These plans may offer you lower monthly payments, especially if your income has been significantly affected due to the pandemic, as payments are tied to your current income. Borrowers may also be able to take advantage of deferment and forbearance options to postpone payments temporarily if you have been furloughed or had a reduction in your compensation whether you have federal or private student loans.
To start taking advantage of this option, you must first discuss your situation directly with your lender.
Talk to your lender
You may usually avoid picking up the phone, but often, it’s the best way to learn about your student loan debt relief options. Start by calling your loan servicer and explaining your situation.
Many borrowers financially affected by the COVID-19 pandemic may not be ready to start making payments next year. There are a few options available, but they all involve calling your loan servicer. – Elaine Rubin @edvisors Click To TweetYour servicer will understand the intricacies of your loans and be able to guide you when you can’t afford your payments. Want to do some research on your own? Try the Loan Simulator at studentaid.gov. When you go to the simulator, you will be presented with three options:
- “I Want to Find the Best Repayment Strategy,”
- “I’m Struggling With My Payments,” or
- “I Want to Simulate Borrowing More Money.”
Start the simulator by choosing the option that best represents your situation. Then, the site will analyze your current debt and payment information to give you a recommendation for dealing with your student loans.
EXPERT: Amy Lins – Money Management International
The best thing a student loan borrower can do before the administrative forbearance ends and payments resume is to review their payment options using the Loan Simulator at studentaid.gov. The loan simulator will calculate estimated payments under all of the repayment plans the borrower is eligible for, and the borrower can select and enroll in the best plan for them. An income-driven plan would be a great option for an affordable payment once payments resume. Keep in mind, some of the income plans can have a payment as low as $0 dollars.
If you’re concerned about repayment, there are many different paths the simulator could determine work best for you. Income-driven repayment plans are the best choice for many borrowers, and there are multiple types depending on your needs. Some of the income-driven repayment plans your Federal Direct Loans could be eligible for include:
Income-Based Repayment creates a new monthly payment based on 15% of your adjusted gross income. Income-Contingent Repayment works the same way, but calculates 20% of your adjusted gross income to determine the payment. PAYE (Pay As You Earn) and REPAYE (Revised Pay As You Earn) calculate your payment at around 10% of your adjusted gross income.
A borrower can contact their lender or servicer to see what repayment plan works best for their individual situation and loan type. – Stephanie Eidelmann @insidearm Click To TweetGet on a repayment plan
Once you’ve used the simulator to review how different options will affect your finances, you can choose a repayment plan that suits your budget. Remember, income-driven repayment plans are usually the best way to lower your payments without large penalties or financial consequences. These plans keep you on track so you don’t miss any payments and risk defaulting.
EXPERT: Ryan Frailich – Deliberate Finances
If you’re unable to pay your loans starting in February, consider opting for an income-driven repayment plan. Since this ties your required payment amount to your income in the previous year, it’s likely that it would substantially lower the payment for people who have suffered financial hardship during the pandemic. It could even bring your required payment as low as zero. This is far preferable to going into forbearance, where interest accumulates and capitalizes at the end of the forbearance.
Even though forbearance isn’t preferable, sometimes it’s necessary to avoid default. Deferment and forbearance are two options you have when you want to remain in good standing but can’t afford to pay.
Apply for deferment or forbearance
These options allow you to skip payments for a certain period of time when you’re having financial problems and can’t afford to pay. However, Elaine Rubin of Edvisors advises being aware of the differences. “If you have subsidized loan funds, interest on subsidized loans will be covered by the government during periods of an authorized deferment. That’s not the case with unsubsidized loan funds,” she notes. “In a forbearance,” she adds, “regardless of loan type, interest will accrue and be the responsibility of the borrower. Any accrued interest on a deferment or forbearance will be capitalized (added to the outstanding principal balance) when the loan returns to a payment status.”
Lins suggests looking into deferment before thinking about forbearance. She highlights that borrowers could “apply for deferment if they meet eligibility requirements – for example, economic hardship deferment or unemployment deferment.” If a borrower doesn’t meet these requirements or has exceeded their eligible deferments, forbearance is the next option.
This is definitely a worst-case scenario option, and I strongly suggest looking into income-driven repayment before using forbearance or deferment. – Lauryn Williams @StudentLoanTrav Click To TweetDeal with taxes
Your Income-Driven repayment plan can be affected by your tax return. Filing your taxes as soon as possible is a good idea.
EXPERT: Jen Smith – Modern Frugality
If you’re still not in a position to make your student loan payments come February, then you’ll want to file your taxes as soon as possible so you can lower the payment on your Income-Driven Repayment plan. You’re only required to recertify your income and household size once a year, but if you’ve undergone financial hardship, you can do it early.
It’s always better to deal with taxes sooner rather than later, whether you have student loan debt or not.
What to do if you kept your source of income
Unemployment hit record highs during the pandemic. If you were able to keep your job, you’re in the ideal situation to get ahead on paying your loans. Here’s some advice for using your steady income.
Keep on paying
If you have automatic payments set up, check with your loan servicer and make sure they’re still going. Some automatic payments were paused due to the pandemic. According to Lins, “establishing automatic payments on your federal student loans makes you eligible for a .25% discount on the interest rate.” It sounds small, but every little bit helps in the long run. If not, just keep making your payments as you normally would. In fact, now would be a good time to make extra payments if you have the cash to spare. Student loans are not gathering interest during this national forbearance period, so everything you pay now will chip away at the principal directly. Lowering your principal means paying less interest in the future.
Consider refinancing or consolidation
Student loan debt consolidation and refinancing are two options for reducing your debt load. Both are a way of combining multiple loans, but there are some important differences. Consolidation can be accomplished through the Department of Education if you have federal loans. Once all your loans are combined, you can enroll in an income-driven repayment plan to more efficiently repay what you owe. Refinancing converts all federal loans to private loans and results in one loan with a lower interest rate. However, Andrew Pentis of Student Loan Hero states that while refinancing is the “only way for borrowers to lower their interest rates,” it can be “risky because it irreversibly strips federal loans of options like IDR and PSLF.”
EXPERT: Barbara Thomas – Education Loan Finance
It’s always a good practice to pay off your loans as quickly and responsibly as possible. For those who are in the position to make consistent payments and are financially stable, now may be a good time to consider refinancing their student loans with a private lender. Student loan refinancing rates are currently near historical lows, making this a very attractive option for those looking to save on interest and pay off their loans faster. However, it’s important to consider that refinancing your federal student loans will cause you to lose access to federal student loan benefits, such as those outlined in the recent CARES Act and others. If you have private student loans, you may want to consider today’s low rates and refinance your loans. If you are not in a financial position to refinance your student loans today, making additional payments on your student loans may be the best option to reduce their principal balance and save money over their loan term.
Check in with your employer
You may think you’re lucky just to be employed during this rough time, but you may be even luckier. Some employers have student loan debt benefits you might not know about.
EXPERT: Adrienne L. Way – Edcor
For those Americans that have been able to work during the pandemic they should make sure they explore all of their employer’s benefits. There are employers that are offering a Student Loan Repayment benefit that, for many companies, offer a nominal benefit to help their employees pay off their student loan debt. If anyone is looking for employment, employers that offer student loan repayment as a benefit is a great way to help with the burden of student loan debt. These student loan repayment programs have helped take, on average, 3 years off repayment for student loans.
What to do if you’re worried about default
When you don’t pay for 270 days, your loans enter default status. This majorly hurts your finances and makes it even more difficult to pay off your loans. If this worries you, your best defense is to get on a payment plan. Deferment and forbearance aren’t ideal, but they’re better than defaulting.
“Once you end up in default, your credit will take a hit. And your loan balance can also take a hit in collection costs and fees from entering default,” says Rubin. “In the federal student loan program, you have options to return your loan to good standing, like rehabilitation or consolidation.”
“And there’s no such thing as a rehabilitation program to have any type of negative reporting removed from your credit report,” Rubin adds. “No matter what type of loan, if you enter default, you want to work with the collections department to avoid forced collections through wage garnishment or tax offsets.”
Stephanie Eidelman of insideARM.com notes that default can limit your options if you don’t get back into good standing. “Borrowers should understand that once they have fallen behind to the point of default, the opportunities for forbearance and deferment are no longer available,” she said. But she emphasized that there are other ways to deal with default.
Borrowers should not ignore payment notices or calls from servicers when they are delinquent. The servicer can help the borrower avoid default. – Amy Lins @moneymanagement Click To TweetUnderstand your situation
If your loans do fall into default, you need to get them back in good standing as soon as possible. There are two ways to do this with federal loans: rehabilitation and consolidation.
Rubin explains that “rehabilitation requires you to successfully make nine months of “reasonable and affordable” on-time payments.”
“If you successfully rehabilitate your loan,” she adds, “the federal government will remove the default record from your credit history. However, they will not remove the months you were reported delinquent.”
EXPERT: Ryan Frailich – Deliberate Finances
The smoothest route out of default on federal loans is loan rehabilitation. This involves you contacting your servicer, agreeing to make nine “reasonable and affordable” monthly payments, over 10 consecutive months. At that time, your loans come out of default. The “reasonable and affordable” piece of this ends up being 15% of discretionary income, which may let you have a payment as low as $5/month if your income is low. This would give you a path out of default while not paying too much, and it should result in the default being removed from your credit history. It does not, however, remove those late payments from being reported on your credit, so while this somewhat preserves your credit score, it can’t make up for the missed payments that occurred along the way.
Unfortunately, consolidation doesn’t have the same benefits for your credit. You can get out of default by consolidating your loans and using an income driven repayment plan, and it’s a faster way to get out of default. But no negative reporting will be removed from your credit report.
A rehabilitation plan would take 9 months, you'd get back on a reasonable payment plan, get your loans out of default, and the best part is they will take it off of your credit report. – Lauryn Williams @StudentLoanTrav Click To TweetIf you have private loans, this process is more complicated. Some private student loans can be discharged in bankruptcy, but there’s not a rehabilitation program like there is for federal loans.
Getting forgiveness
You may have heard of Public Service Loan Forgiveness (PSLF). It was in the news last year because it was deemed ineffective – very few people were ever able to get their loans forgiven. However, depending on your situation, it may still be a good idea to look into.
EXPERT: Lauryn Williams – Student Loan Planner
It is one of the biggest myths out there that Public Service is not giving people forgiveness and that it’s not worth pursuing it. The reason the numbers are low is because in 2007 when the program was invented, they also still had what are called FFEL loans, which do not qualify for Public Service Student Loan Forgiveness. Some people were unaware of the criteria, waited the ten years and when 2017 rolled around they thought they would be granted forgiveness without realizing they didn’t meet the criteria. Now more than ever, people are aware of the criteria. The federal government has updated its payment website. While the system is not perfect, many people are qualifying for Public Service Loan Forgiveness and are getting it. In fact, in 2020 we are expected to see the numbers go up significantly because as of 2010 only direct loans were offered. We expect the numbers to only climb from here on out. The other type of forgiveness to get would be taxable forgiveness, where you pay for a period of 20 or 25 years instead of that shorter 10 year period that Public Service offers. At the end of that 20 or 25-year period, whatever is left over is forgiven, however, you need to pay taxes on that amount. The problem is a lot of people do not know how to calculate that tax liability, and they don’t know how to save up for that tax liability. At Student Loan Planner we do that math for you – how much you have to save and where to save it.
Check the criteria for PSLF if you think it may apply to you. The program can get you out of debt faster and for a fraction of what you really owe. And don’t let the news worry you too much. Even if you don’t qualify for PSLF in the end, keeping up with payments to try to qualify will keep your loans in good standing and help you maintain the path to repayment.
Public Service Loan Forgiveness is still a viable option and the headlines are very misleading. – Patti Hughes @lakelifewealthadvisory Click To TweetNot sure why you wouldn’t qualify? Lins explains it like this:
All amounts that are forgiven due to Public Service Loan Forgiveness (PSLF) are not taxable by the IRS, which means if you qualify, it is definitely worth applying for. – Stephanie Eidelman @insidearm Click To TweetEXPERT: Amy Lins – Money Management International
There are two primary reasons people didn’t qualify for Public Service Loan Forgiveness (PSLF) when they thought they would. Some people didn’t qualify because they were not in an eligible repayment plan—only the standard plan and the income-driven plans (Income-Based Repayment, Income-Contingent Repayment, Pay As You Earn, and REPAYE) qualify. Borrowers on other repayment plans thought they qualified, but didn’t. To help those borrowers who were denied because they were on the wrong repayment plan, Congress created the Temporary Expanded Public Service Loan Forgiveness (TEPSLF) program. The other reason people failed to qualify is that they did not work for a qualified employer, so verifying employer eligibility is an important first step for anyone considering PSLF. PSLF can definitely be worthwhile for some borrowers. Borrowers considering PSLF can use the Loan Simulator at studentaid.gov to review their loan payments on various repayment plans and they can run their simulations with and without Public Service Loan Forgiveness selected in the simulator. This will give them an idea of their payment, total to be repaid, timelines, and forgiven amount if any under multiple scenarios.
Additionally, PSLF isn’t the only option you have for getting your loan forgiven. Teacher Loan Forgiveness could work for you if you work at a Title-I school for five consecutive years. Those with Perkins loans can look into Perkins loan cancellation programs.
Getting ahead in the new year
For those who kept their source of income during the pandemic (and even those who didn’t), the new year presents a great opportunity to get ahead of your student loan debt. Interest is at 0%, and everything you pay will attack the principal directly.
Those who've maintained employment can get ahead by making payments. Once interest begins accruing again, you'll always have to pay that first. – Jen Smith @modernfrugality Click To TweetNow is the time to get aggressive. You’re likely living more frugally during the pandemic, anyway, since there’s not much to do in quarantine. Use any extra cash to make extra payments toward your student loan debt.
Pentis encourages borrowers to make bigger payments if they can or even start paying twice a month. “Borrowers pursuing a federal loan forgiveness program, on the other hand,” he notes, “are likely better off taking the slow-and-steady approach, paying the minimum per month to leave more leftover for Uncle Sam to eventually forgive.”
EXPERT: Lauryn Williams – Student Loan Planner
If you’ve been fortunate enough to get ahead and continue to make payments, it’s likely because you plan to pay off your student loans in full. As soon as the pandemic craziness has settled down, it’s probably best for someone who can pay down their loans right now to refinance for a lower interest rate. The federal system generally has higher interest rates than those offered by private companies. So if you’re going to pay the loans back aggressively, you want to do so at the lowest interest rate possible. Recently this hasn’t really been possible, because the federal system is offering 0% interest. If they do extend the moratorium longer than January 31, 2021, then I would suggest to continue aggressively paying off your loans at 0% interest and try to set a goal to pay off a specific amount based on your budget.
Besides paying off your loans quicker, making larger payments now can also help you focus on other priorities. People’s emergency funds have suffered during this time, so if you can, start building yours back up. In addition, you could start setting aside money for retirement for even more of a headstart in the new year.
EXPERT: Patti Hughes – Lake Life Wealth Advisory Group
For those who have maintained employment throughout the pandemic, the best approach to getting ahead would be to explore all options available to them to lower their student loan payment so that they can simultaneously fund their emergency fund and begin saving for retirement. If a borrower can demonstrate that they have a personal financial hardship, meaning that the payments under an income-driven repayment plan are less than under a standard ten-year payment plan, they are eligible for payment plans that can limit the student loan repayment to 10% of their discretionary income.
This year may also be a good time to consider refinancing. “If you were able to make a dent in your student loan debt due to having a lower interest rate,” says Rubin, “it may be worth it to seek out a way to permanently reduce your interest rate—and if you have a federal student loan, private student loan refinance is the only way you can potentially reduce your interest rate.” Especially if your credit is strong, qualifying for a much better interest rate may be possible.
