By Claire Ballentine, and Ella Ceron
Aug. 3, 2023
Ignoring federal student loan bills could be a good option for some when payments come due this fall.
A one-year leniency program from the Biden administration will remove the harshest penalties for missed payments after billing resumes in October. That means prioritizing other higher-interest debt might make sense, experts say.
Although bills will be sent out and interest will accrue, borrowers who miss payments will not be considered delinquent, reported to credit bureaus or placed in default. They also won’t be referred to debt collection agencies, and the interest accrued during the on-ramp period won’t capitalize, meaning it doesn’t get added to the loan’s principal.
The program, announced after the Supreme Court struck down the president’s one-time loan forgiveness plan, will essentially function like a general forbearance program, which allows borrowers experiencing hardship to request up to 12 months of reprieve from making payments, said Travis Hornsby, the founder of the personal finance resource site Student Loan Planner.
Technically, almost 27 million borrowers with a total of $1.1 trillion in federal student loan debt will need to start repayments after the expiration of a pandemic-era stimulus measure on Oct. 1. But with the average payment at $400 a month before the pandemic, many Americans will be faced with more bills than they can afford, putting them at risk of becoming delinquent on other debt products including credit cards and auto loans.
Here’s what you should do if you’re struggling to make ends meet:
Prioritize Higher Interest Debt
When thinking about repaying debt, it’s all about the interest rates. Although making minimum payments on all your obligations is always the best move, you should prioritize those with the most expensive borrowing costs, said Francisco Ayala, financial life planner at the Coleridge Group in Phoenix.
For instance, credit cards almost always have a higher interest rate than student loans. The average rate for a credit card is now 24.24%, the highest since 2019, according to LendingTree.
Jake Courtney, founder of MillennialFP in Ohio, said this is a good time to take stock of all your bills and decide which ones are the most important. In most cases, that will be credit card debt, due to the interest rate. Then comes personal loans and student loans usually.
“If borrowers have an above-average credit score, they could refinance the credit card debt into a personal loan at a much lower interest rate, or open a balance transfer credit card with a 0% intro period,” Courtney said.
Several repayment programs can help lower your monthly bill. The newest is the Saving on a Valuable Education (SAVE) plan, which will raise the threshold for people who qualify for as little as zero-dollar-a-month payment plans where the Department of Education won’t charge any monthly interest not covered by a borrower’s payment. It replaces the old Revised Pay As You Earn (REPAYE) plan — and borrowers enrolled in REPAYE will be automatically rolled into SAVE, department officials said.
“There are very few scenarios where their student loan payment would not decrease substantially by switching to the new SAVE plan,” Courtney said. “That’s where I would start first.”
For example, a borrower with no dependents who makes $38,000 a year would pay $43 a month under the new SAVE plan, down from $134 a month under REPAYE, according to the Department of Education.
Income-driven repayment plans may also make sense for some borrowers who want to play a longer game of debt forgiveness. Monthly payments are based on 10% of a borrower’s income, and the debt may be eligible for forgiveness after 20 or 25 years of making payments, depending on if it’s a undergraduate or graduate loan.
Similarly, borrowers employed by the government or certain nonprofits may qualify for a Public Service Loan Forgiveness plan that is also income based and extinguishes qualified debt after 120 payments.
Make a Plan for Next Year
Borrowers reliant on Biden’s new leniency measures will still need to make a plan for the future — especially with the program slated to end Sept. 30, 2024 — said Betsy Mayotte, the president of the Institute of Student Loan Advisors.
“If your issue is that your rent or mortgage payment is high, that's still going to be the case next year,” she said. “I wouldn't wait. I would buckle down and figure out how to fit it all in.”
Hornsby with Student Loan Planner recommends using online apps to track your spending and figure out areas where you can cut back, like subscription services and eating out. And although retirement contributions are very important, cutting back on those to better afford student loan payments might make sense.
“If you're still struggling, try to carve out some money in the budget for a financial planner that can also help you get your finances organized,” he said.
© 2023 Bloomberg L.P.