As part of President Biden's efforts to make student loans more manageable for Americans, the administration has created a 12-month on-ramp to repayment. In a nutshell, while recent legislation forced the interest and repayment pause to end after August, the administration understands many people might have difficulty resuming their payments right away.
The on-ramp to repayment starts Oct. 1, 2023, as most borrowers will see their first student loan payment due date sometime in October. It lasts for one year, ending on Sept. 30, 2024. However, it's worth noting that it's possible the on-ramp could be extended if the administration feels enough borrowers are benefiting from it.
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What happens during the repayment on-ramp?
During the on-ramp, federal student loan payments are officially due. However, if borrowers choose not to make those payments, there are a few things that will not happen:
- Late or missed payments won't be reported to the credit bureaus.
- Borrowers who don't pay will not be in default on their student loan obligations.
- Borrowers who don't pay won't have their accounts sent to collections agencies.
In short, the on-ramp is designed to protect borrowers from the worst effects of not paying their student loans. Effectively, it is the same thing as a loan forbearance, except that if you need it, you don't need to act; simply don't make your payments.
Pros and cons of using the on-ramp
The obvious advantage of the repayment on-ramp is that borrowers have the financial flexibility to decide whether they can comfortably make their student loan payments for a full year. If you are having difficulty figuring out how to fit student loan payments into your budget starting in October, you can take some additional time. And if at any point during the next year you run into financial hardship, such as from a job loss, the on-ramp can provide some protection from adverse consequences.
On the other hand, there's one thing that the on-ramp does not prevent. Interest will still accumulate on your student loans, whether you choose to take advantage of the on-ramp or not. For example, if you owe $40,000 in federal student loans at an average interest rate of 6%, this could cause your balance to grow by as much as $2,400 if you decide to take full advantage of the one-year period.
Is there a better way?
While the on-ramp provides some valuable flexibility, the administration's new SAVE income-driven repayment plan could be a better choice. Or at the very least, you may want to apply for it first before deciding whether you need to use the on-ramp.
Thanks to a big change in how "discretionary income" is calculated, the SAVE plan is expected to result in monthly student loan payments of $0 for more than 1 million additional student loan borrowers. And the best part is that if your payment is set at zero under the SAVE plan, unpaid interest doesn't accumulate on your account.
Under the SAVE plan, single borrowers who earn less than $32,805 will not be required to make any student loan payments. A family of four that earns less than $67,500 won't have any payments. And even if the SAVE plan doesn't eliminate your monthly payment altogether, it could make it more manageable than you think.
The bottom line is that the repayment on-ramp is certainly a valuable addition to the tools in place to ensure borrowers' transition back to student loan repayment is as smooth as possible. But it's important to explore the other ways to make your loan payments more affordable before you decide to take advantage.
