The resumption of student loan payments has brought about significant challenges for borrowers. Recent data from the U.S. Department of Education reveals that only 60% of individuals with federal education loans had made payments by mid-November. This lack of progress in repayment is not entirely surprising, given that many borrowers were already struggling to make payments prior to the COVID-19 pandemic. The situation is exacerbated by the staggering amount of outstanding education debt in the United States, which currently exceeds $1.7 trillion. It is worth noting that education debt now surpasses both credit card and auto debt. The average loan balance at graduation has tripled compared to the 1990s, reaching $30,000 from $10,000. Furthermore, approximately 7% of student loan borrowers owe more than $100,000.
Recognizing the financial strain faced by borrowers, the Biden administration has implemented a 12-month “on ramp” to repayment. This approach aims to shield borrowers from the dire consequences of falling behind. Additionally, President Joe Biden has expressed his commitment to finding a solution for student debt cancellation, following the Supreme Court’s dismissal of the initial plan. These efforts are undoubtedly welcomed by borrowers who are grappling with repayment challenges.
For borrowers unable to meet their repayment obligations, several alternatives are available. One recommended course of action is to determine if they qualify for a deferment. This option can prevent loans from accruing interest, unlike forbearance, where interest often continues to accumulate. In the case of unemployment, borrowers can request an unemployment deferment from their servicer. Similarly, individuals experiencing various financial hardships may be eligible for an economic hardship deferment. For instance, federal or state aid recipients and Peace Corps volunteers are among those who may qualify for this deferment.
Apart from the aforementioned deferments, borrowers can explore lesser-known options such as the graduate fellowship deferment, the military service and post-active duty deferment, and the cancer treatment deferment. However, in cases where deferment is not applicable, borrowers may request a forbearance. While this allows borrowers to defer payments for up to three years, interest continues to accrue during this period. Consequently, borrowers may end up facing a larger bill once the forbearance period concludes. To illustrate, consider a $30,000 student loan with a 5% interest rate, which would accumulate an additional $1,500 in debt annually under forbearance. To mitigate this, it is advisable for borrowers to make interest payments during the forbearance period to prevent their overall debt from increasing. Despite this advice, forbearance and deferment should be treated as last-resort options, far preferable to defaulting on loans.
Financial expert Betsy Mayotte recommends that borrowers only resort to forbearance or deferment for short-term hardships, such as unexpected medical expenses or temporary unemployment. Instead, borrowers are encouraged to explore payment plans that are within their means. One particular option is income-driven repayment plans, which cap monthly payments as a percentage of discretionary income. Furthermore, these plans offer loan forgiveness after 20 or 25 years, depending on the specific plan. Notably, the Biden administration has introduced a new repayment option: the Saving on a Valuable Education (SAVE) plan. Under this plan, borrowers may pay as little as 5% of their discretionary income toward their undergraduate student loans, and some borrowers may even have a $0 monthly bill. However, the full benefits of this plan will only take effect in the summer of 2024 due to regulatory timeline changes. Borrowers can utilize calculators available on websites such as Studentaid.gov or Freestudentloanadvice.org to compare the monthly payments under different plans and choose the most suitable option.
The struggle to resume student loan repayments is a widespread issue, affecting a significant portion of borrowers in the United States. However, amidst these challenges, the Biden administration has taken steps to alleviate the burden through the implementation of a 12-month “on ramp” to repayment and the exploration of student debt cancellation. Borrowers should carefully consider their alternatives, such as deferments and income-driven repayment plans, before resorting to long-term forbearance. By understanding the available options and choosing a suitable payment plan, borrowers can navigate the repayment process with greater ease and financial stability.
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