(This column originally appeared in Entrepreneur)
It’s almost time to start paying back your student loan. Are you ready?
Key Takeaways
- Student loan repayments have been on pause since March 2020, but borrowers will have to start paying both the principal and interest due in October 2023.
- Interest started accruing on loans beginning Sept. 1.
-
If you left school within the last six to nine months, you are still in your automatic grace period.
After a three-year hiatus, repayments on federal student loans begin again this October. If you already have a student loan that’s previously been suspended because of the Covid-19 pandemic, you will be required to resume paying both the principal and interest due.
Thanks to the CARES Act, federal student loans were paused in March 2020 with interest at 0%, and it’s stayed that way since. President Joe Biden tried to initiate a plan to forgive $430 billion of student loan debt, but the Supreme Court blocked that plan in June when it ruled the program an unlawful overreach of executive power in a 6-to-3 decision. After this long hiatus, borrowers will have to once again start paying down their loans plus interest.
As a certified public accountant, there are some common questions you might have about this process that I can help answer. Here’s what you need to know.
What loans are affected?
All federally-backed loans for financing education that have been issued by the U.S. government through the U.S. Department of Education. Loans received from private lenders are subject to separate rules and repayment terms from those borrowers.
What types of federally backed student loans are there?
The most popular federally-backed student loan program are Direct Subsidized Loans, where the U.S. Department of Education pays the interest while a borrower is still in school at least half-time, for the first six months after they left school and during a period of deferment (a postponement of loan payments). There are also Direct Unsubsidized Loans where borrowers are responsible for paying the interest during all periods. Other student loan options are available such as the Parent PLUS, Graduate PLUS and Direct Consolidation programs.
Who services these loans?
There are currently eight federal student loan servicers:
- Edfinancial
- MOHELA
- Aidvantage
- Nelnet
- OSLA Servicing
- ECSI
- Great Lakes Educational Loan Services
- Default Resolution Group
When you receive a federal student loan, it’s automatically assigned to one of these servicers. Servicers are allowed to transfer loan accounts between each other.
When does repayment begin again?
Your first payment will be due in October 2023 and you should be receiving notice from your loan provider about 21 days before your due date. Interest restarted on Sept. 1, 2023.
What if I don’t receive notice?
The first thing you should do is reach out to the previous company servicing your loan to find out its status and whether or not it’s been transferred to another service provider. You can also look up your loan status in the National Student Loan Data System.
Is there any grace period remaining?
Yes, if you left school within the last six to nine months, you are still in your automatic grace period.
What payment options do I have?
There are currently seven options for paying back your student loans.
- Standard Repayment Plan: 10-year term with fixed payments.
- Graduated Repayment Plan: 10-year term with lower payments earlier, then gradually increasing.
- Extended Repayment Plan: 25-year term with both fixed or graduated repayment options.
- Saving on a Valuable Education (SAVE) Plan (formerly known as Pay As You Earn Repayment Plan): Payback is based on 10% of your discretionary income (the money you have left after paying taxes and personal necessities, such as food, shelter, and clothing) but no larger than what you would pay under the Standard Repayment Plan.
- Income-Based Repayment Plan: 20-25 year terms with payments based on 10-15% of discretionary income with any remaining balance forgiven.
- Income-Contingent Repayment Plan: The lesser of payments of 20% of your discretionary income or what you’d pay back over 12 years.
- Income-Sensitive Repayment Plan: 15 years of monthly payments based on annual income.
Can I change my payment plan?
Yes, you can usually change your payment plan at any time at no charge. You should contact your loan service provider to do this.
Which payment plan is best for me?
This depends on various factors including your income, assets and ability to pay back your loans. It’s best to consult with a financial advisor to answer this question.
What are the interest rates on student loans?
Interest rates vary by loan type, but they are currently in the range of 5.5% to 8.05%.
How do I know if my loan has been forgiven?
The Biden Administration has, through executive orders, changed the terms of some of the federally-backed student loans that have resulted in forgiveness for certain debtors. To find out if your loan is eligible for forgiveness, you should contact your loan service provider.
What if I can’t afford to pay my loans?
Your best bet is to talk to your loan service provider to see if there’s a better payment plan to accommodate your financial situation.
What if I default on my student loans?
Your federally-backed student loan is like any other long-term debt commitment. If you fail to meet those commitments you’ll find yourself dealing with collection agencies, paying penalties and interest, seeing your credit scores negatively affected and being potentially ineligible for any future student or federal aid, among other consequences.
What if I’m already in default?
The government offers options to get your loans back in good standing. Call 1-800-621-3115 and ask about their Fresh Start program where you can work out a repayment plan and have your loan transferred to the Default Resolution Group which can assist in getting the loan back into “in repayment” status.
Where can I go for additional help?
Start with the Department of Education’s main website for federal student loans. Make sure you have an online account. If you’re unable to log in to find your service provider or get the status of your loan, call 1-800-4-FED-AID (1-800-433-3243) or 1-800-621-3115.
