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Picture of Christopher A. Hopkins, CFA

Christopher A. Hopkins, CFA

Start preparing today for return of student loan payments

The Supreme Court last week struck down President Biden’s $430 billion student loan forgiveness plan, ruling that such a large commitment of taxpayer dollars usurped Congress’s constitutional power of the purse. But perhaps of more immediate concern is the impending September end of the 3 ½ year moratorium on federal student loan payments.

Much has changed since the last time a payment was due, including a major reshuffling of the private servicing companies in the wake of scandals and new regulations. roughly 4 in 10 borrowers will now owe a different company than when they last made a payment. Meanwhile, Congress has failed to provide additional funding necessary to handle the resumption of 40 million loans, leaving the servicers understaffed and setting the stage for the equivalent of a 50-car pileup for those who wait too long to figure out their status. If you or a family member have benefitted from the pause, begin preparing now.

Halting payments and interest accrual on federal student loans was one of the emergency support measures adopted in 2020 under the CARES Act Covid relief bill. The delay has been extended 9 times over 2 Presidential administrations and has overstayed its welcome. Clearly, there was a broad consensus supporting rapid action to address the potential financial hardship due to the pandemic. But as with many well-intentioned but hurried interventions, the loan moratorium created unintended consequences that multiplied with each successive extension, and Congress provided for the end of forbearance as part of last month’s debt ceiling bill.

Because there was no means or income testing, the long hiatus most rewarded those with the greatest debt, he highest interest rates, and greatest ability to repay, generally graduates with medical or professional degrees and large grad school loans.

Data from the Center for a Responsible Federal Budget demonstrates that the pause effectively amounts to a partial debt cancellation resulting from forgiveness of 42 months’ worth of interest as well as the erosion in the real cost of the debt due to higher inflation. Extrapolating from CRFB data, an average 2019 medical school and law school diplomate on the 25-year plan will receive $80,000 and $47,000 respectively in effective debt forgiveness compared with around $5,000 for the typical bachelor’s degree recipient.

Furthermore, one might have expected borrowers to take advantage of the lull to pay down outstanding debt, but according to a recent paper from the Chicago Fed, not so much. Among those whose loans were not delinquent, the average borrower actually increased their other non-student debt, taking on an extra $1,200 in total debt and $20 per month in payments. Not what was hoped for.

It is important to acknowledge that during a crisis, too much relief is preferable over too little, and the magnitude of the pandemic disruption was unprecedented in our collective experience. But the economic justification was largely obviated a year ago and the further extensions have complicated normalization. The CRFB expects the pause to add $200 billion to the national debt.

As payments return, it is critical to get out in front of the hordes of procrastinators descending upon besieged call centers. Here are a few steps to take now to prepare for success once payments resume.

Log into your account. Review your dashboard at StudentAid.gov, the Department of Education’s central education loan site. Verify that your contact information is correct, so you won’t miss any important notifications. Then identify which types of loans you have, and which companies service those loans, as well as your balances, interest rates, and payment terms.

Login to each of your loan servicers to update your profile and verify required payments and balances. While you should receive a notice of payment due from each company, jump the line and obtain the information now allow time to prepare. Some payments may be due as early as September 21.

Evaluate repayment plans. Although your loan is already subject to a particular repayment arrangement, you may want to review your options again and change your selection. While it is best to stick to the standard 10-year plan, there are several income-based options that can extend over 20 or 25 years (but accrue more interest expense over their repayment life). Furthermore, President Biden has proposed changes to the income-based plans which, if they pass constitutional muster, will reduce minimum payments and increase the amount eligible for forgiveness after a 20- or 25-year runway.

Start budgeting now. Don’t wait for the x-date to reshuffle your budget to accommodate the additional monthly outlay. Have a plan in place for trimming expenses, increasing income, and especially reducing other outstanding debt like credit card balances well before the payments kick in again. Also, many servicers offer an interest rate discount if you arrange for autopay, so set it and forget it.

Get help. If you simply cannot make the required payments, be proactive. Utilize the loan simulator tool on StdentAid.gov to game out a viable scenario, then contact your loan servicer directly to ask for an emergency short-term forbearance. There are also special provisions for disability, and debt forgiveness for certain government and non-profit employees and some educators, healthcare workers and military veterans. And if your loan was already in default before the moratorium, you also have a one-shot opportunity to rehabilitate it through the Department of Education’s Fresh Start initiative.

Forgiveness is kaput, and payments are restarting. Start preparing now.

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