Most federal student loans have been in hibernation since March 2020—no required payments, no interest charges, and no bill collections. The pause, started under the Trump administration, has saved borrowers a total of $195 billion, according to the Federal Reserve.

Earlier this month, the Biden administration extended the end of the pause from May until August 31, 2022.

Listen to audio highlights of the story below:

“That additional time will assist borrowers in achieving greater financial security and support the Department of Education’s efforts to continue improving student loan programs,” President Joe Biden said. He also promised “additional flexibilities and support for all borrowers.”

Unless the administration provides another extension, payments will resume in September for the 37 million borrowers who have benefited from the program. If you’re one of those borrowers, it’s best to assume this extension will be the last and prepare for an increase in your monthly expenses.

“The Government Accountability Office (GAO) has estimated that over half of borrowers will be at increased risk of delinquency when the payment moratorium is lifted,” said Regan Fitzgerald, manager of The Pew Charitable Trusts’ student borrower success project. “Our research during the pause demonstrates many borrowers will need assistance, including more affordable payments, when the pause ends.”

Fitzgerald points to a survey Pew conducted last spring that found two-thirds (67 percent) of borrowers said it would be difficult for them to afford payments if they resumed the following month.

A Fresh Start

As part of the latest payment extension, issued on April 6, the U.S. Department of Education announced Operation Fresh Start. The program is designed to “wipe the slate clean” for borrowers who are delinquent or in default on their student loans, “and make them current again,” said Mark Kantrowitz, an expert on student financial aid and author of How to Appeal for More College Financial Aid.

“If you benefit from the Fresh Start initiative, your delinquencies and defaults will be removed from your credit history, which should improve your credit scores,” Kantrowitz told Checkbook. “The idea is not just to give people a clean slate, but to get them back into making payments on their loans.”

The Department of Education promised to provide details about the Fresh Start program in the next few weeks. In the meantime, we know this reset will have a significant impact on several million borrowers in default (being more than 270 days late).

When you’re in default, you lose eligibility for lower payment options—such as income-driven plans, deferments, forbearance, and public service loan forgiveness said Betsy Mayotte, president and founder of The Institute of Student Loan Advisers, a nonprofit that educates and provides consumers with free expert advice about student loans.

The federal government can also garnish your wages, Social Security, or other government payments without taking you to court. A default has a “much bigger negative impact on your overall credit than a 90-day delinquency does,” Mayotte said.  

Prepare Now to Make Monthly Payments Again

Most student loan borrowers have not thought about making payments for more than two years. Maybe you moved, or changed banks. Here are a few things you should do to get ready for payments to resume.

Update your contact information with your loan servicer by going to StudentAid.gov. “If your contact information is old, they may not be able to reach you, not just about the restart of repayment, but possibly there might be some loan forgiveness,” Kantrowitz said.

You might find that your loan servicer has changed. Since the pandemic, three federal student loan servicing companies have left the business: Granite State (the New Hampshire Higher Education Loan Corp.), FedLoan Servicing (the Pennsylvania Higher Education Assistance Agency), and Navient.

Use AutoPay. It’s a good idea to review your autopay enrollment or to sign up for the first time. You can do that on the servicer’s website. Of course, you’ll need to make sure there’s enough money in your checking account each month to cover those automatic debits.

“If you sign up for autopay, you’re much less likely to be late with a payment,” Kantrowitz said. “Plus, autopay gives you the additional benefit of a quarter of a percentage point reduction in your interest rate. So, not only are you less likely to be late with your payments, but you’re going to save money.”

Know your options. Maybe your current repayment plan is no longer working for you. The U.S. Department of Education’s Loan Simulator can help you calculate loan payments and choose a repayment option that best meets your current needs and goals.

Should I Start Paying Now?

Some people continued to make payments during the pause to whittle down debt. During the pause, no additional interest was being charged, so any payments directly reduced the principal. Normally, that’s a wise financial strategy. But right now there’s a lot of pressure on the Biden administration to offer debt cancellation.

When White House Press Secretary Jen Psaki was asked about loan forgiveness at an April 6 press briefing, she said the president “has not ruled out” the possibility, adding “he would encourage Congress to send him a bill cancelling $10,000 in student debt, something that he talked about looking forward to signing on the campaign trail.”

On Tuesday, The Washington Post reported that in a closed-door meeting with Democrat lawmakers, the president “signaled multiple times that he was prepared not only to extend the current moratorium but to potentially take executive actions canceling some of the debt altogether.”

Checkbook asked Anna Helhoski, student loan expert at NerdWallet, a personal financial website, how borrowers should factor-in that uncertainty.

“Counting on a broad, sweeping new debt forgiveness program isn’t really a repayment strategy. I’m not talking about the existing programs; there’s a great strategy involved in using them,” she said. “But, even if there is broad forgiveness, we don’t know how much there will be, and it might not even end up changing your monthly payment amount if you owe more than what’s forgiven.”

Helhoski suggested to take the money you might pay now and put it into a high-yield checking account. You’ll make a little interest and be better prepared when payments resume.

If you’re pursuing any type of loan forgiveness (more on that below), you should not make payments before the pause ends, Kantrowitz advised, because that will reduce the amount of forgiveness you’ll ultimately receive.    

What if You Know You Can’t Pay?

Once payments resume, your servicer will send you a billing statement or other notice at least 21 days before the first payment is due. In the meantime, you can contact your servicer to get an estimate of your payment amount and due date.

If your income has dropped since the pandemic, now is a good time to ask yourself “How am I going fit this extra $200, $300, or $400 monthly payment back into my budget?” Are there expenses you can cut; things you can really do without? Sit down and calculate the money you’ll have coming in compared to what you’ll be spending each month. If you can’t make it work, you need to take steps now to deal with that reality, such as applying for an economic hardship or unemployment deferment.

          More Info: Debt.org has detailed information on options for those who can’t make student loan payments.

Some good news for those on an income-driven repayment plan or public service loan forgiveness program: The pause did not slow down your progress. Those suspended payments were counted toward your forgiveness.

The Education Department recently acknowledged long-standing communication problems with its income-driven repayment programs that often resulted in payments not being counted and forgiveness being denied. To fix those problems, the department will relax the rules and provide a one-time account adjustment that should get more than 3.6 million borrowers closer to eliminating their student loan debt.

Where to Get Help

You can get one-on-one counseling from an NFCC certified student loan counselor. These non-profit agencies will provide a comprehensive review of your finances, and a repayment plan that works best for your situation. In many cases, the initial consultation is free or inexpensive.

The non-profit Institute of Student Loan Advisors answers student loan questions for free via email.

“Borrowers should not freak out, the institute’s Mayotte told Checkbook. “You should manage your student debt, rather than letting it manage you. If you’re struggling, get some expert advice.”

Fraud Alert: Scammers will try to cash-in on the resumption of student loans payments. They’ll offer “too-good-to-be-true” payment options, and promise to erase your debt. Of course, they always want money upfront. Don’t fall for their lies. NerdWallet has advice on spotting student loan forgiveness scams.

 

 

Contributing editor Herb Weisbaum (“The ConsumerMan”) is an Emmy award-winning broadcaster and one of America's top consumer experts. He is also the consumer reporter for NW Newsradio in Seattle. You can also find him on Facebook, Twitter, and at ConsumerMan.com.