Student loan payments are resuming for the first time since early 2020 for the millions of federal student loan borrowers in the United States.
However, the Biden Administration has built in a safety net to the end of the payment pause that could help many people who have difficulty fitting student loan payments into their budgets. Here are the key details of the so-called "on-ramp" to repayment and why there might be a better option if you have trouble affording your student loan payments.
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The 12-month student loan repayment "on ramp"
It's been three and a half years since federal student loan borrowers were required to make any payments, so it's fair to say that many people got used to not incorporating their student loans into their budgets. With repayment starting again, it could create quite a financial shock for many people.
To minimize any adverse effects to people who have a tough time resuming their payments, the Biden Administration is offering a 12-month "on-ramp" to student loan repayment.
Technically, student loan payments are still due. But borrowers who don't pay won't have to pay any late fees or penalties. Their missed or late payments won't be reported to the credit bureaus. And the Department of Education won't take any action to collect the missed payments and won't consider the loans to be in default. The on-ramp will last through September 2024, which gives people who have difficulty resuming payments a bit of a cushion.
Effectively, the repayment on-ramp is the same thing as a 12-month student loan forbearance for those who need it, except that you don't have to ask for it. If you want to take advantage of the on-ramp, you simply don't make your student loan payments.
One big caveat
The Department of Education encourages borrowers who can afford to make their student loan payments to do so. And there's one big reason why they should.
One thing the student loan repayment on-ramp does not do is protect borrowers from interest accumulating on their accounts. Whether you decide to resume student loan repayment in October or not, interest started to accumulate on Sep. 1 and will continue to do so.
Here's why this is important. Let's say that you have $50,000 in federal student loans with an average interest rate of 6%. Every month, $250 in interest is accumulating on your account. If you take full advantage of the on-ramp and don't make any payments until Oct. 2024, your balance will be over $3,000 higher.
An alternative to using the on-ramp
If you're having a tough time figuring out how to start repaying your student loans again, it could be a better idea to enroll in the new SAVE plan, which is designed to be the most beneficial income-driven repayment option available to student loan borrowers.
Without getting too deep into the details, here are the basic ideas behind the SAVE plan:
- Your monthly payment will be limited to just 5% of your discretionary income for undergraduate loans or 10% for graduate study loans.
- The definition of discretionary income is raised to 225% of the federal poverty level. This means that a family of four making less than $67,500 in 2023 wouldn't have to make any student loan payments at all.
- If the payment you're required to make isn't enough to cover the interest that accumulates, any unpaid interest will not be added to your account. This is perhaps the most important differentiator from the repayment on-ramp.
If you were already enrolled in the REPAYE plan (the most popular existing income-driven plan), you'll automatically be enrolled in SAVE. If not, you'll have to enroll, which you can do through the Department of Education's website. Before deciding to take advantage of the repayment on-ramp, it's a smart idea to explore what your repayment obligation would be under the new plan.
The bottom line
To be perfectly clear, the student loan repayment on-ramp is certainly a nice safety net to have. But it isn't without a big drawback, and it's important for borrowers to explore all of their repayment options before deciding to take advantage.
