The US Education Department will send student loan bills for the first time in 3 years — but also made cuts because it’s strapped for cash. What could go wrong?
A cash crunch at the U.S. Education Department is forcing officials to cut customer service ahead of the “unprecedented” restart of student loan payments for 43 million Americans.
Officials worry the agency may not have enough funding to implement “a smooth return to repayment” when millions of Americans are sent student loan bills for the first time since the COVID-19 pandemic began in March 2020.
What does a bumpy road look like for borrowers? Not only will you have to adjust your monthly budget to cover your student debt — but you may also struggle to connect with your loan servicing company if you have questions or concerns and everything could take longer to process.
“It’s a slow-moving car crash,” Jared Bass, senior director for higher education at the Center for American Progress and a former Democratic appropriations staffer, told POLITICO. “We see what’s about to unfold, so let’s just prevent it now and just step in and take preventative measures.”
Education Secretary Miguel Cardona has called for an “all hands on deck” approach to help stem any unnecessary harm to borrowers — and there are also things that you can do to make your student loan repayment as pain-free as possible.
When will student loan payments restart?
There’s still a lot of uncertainty around when borrowers will actually have to start repaying their student debt — and when the Biden administration’s funding challenges could really become an issue.
Early this year, President Biden extended the pause on federal student loan repayments while the Supreme Court debates his plan to cancel student debt for tens of millions of Americans. Payments will resume either 60 days after the litigation is resolved or 60 days after June 30 — whichever comes first.
However, the Education Department is allegedly mulling over a transition period that could push repayment back to October, according to documents obtained by POLITICO.
The Department is looking at a range of borrower-friendly initiatives to help people resume their payments and “remain in good standing with their student loans” — with “a particular focus on those who are most at risk,” it shared in a budget document released last month.
For instance, officials also considering a “safety net” or grace period — potentially up to a year after repayment begins — where borrowers won’t be penalized for missing payments, POLITICO reported.
But the Education Department needs adequate funding to bring these initiatives to life — money that Congress has so far been unable to provide due to Republican dismissal of Biden’s student debt cancellation plan.
While politicians debate, here are three ways to make your student loan repayments as pain free as possible.
Rebuild your budget
According to the Federal Reserve Bank of New York, the average student loan monthly payment is $393.
Finding nearly $400 every month after a three-year freeze of not having to pay anything could be tricky — especially if you’ve slipped into new habits and allocated that cash to other more urgent needs.
You may want to revisit your budget to ensure you have enough money to cover your student debt. If you don’t, the consequences could be dire.
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If you miss a student loan payment, even by just one day, your loan becomes past due or delinquent. It will stay that way until you repay the past-due amount or make other arrangements with your lender.
If you’re delinquent on your loan for 90 days or more, your loan servicer can report the delinquency to the three major national credit bureaus, which will cut your credit rating.
With a poor credit rating, you may find it difficult to obtain credit cards, home or car loans, or other forms of consumer credit — and if you can borrow money, you’ll likely have to pay a higher interest rate than someone with a good credit rating.
If you’re not sure how to rebuild your budget to include student loan repayments, it might be helpful to reach out to a professional financial adviser advisor who can set you on the right path.
Make payments, even though you don’t have to
You don’t have to wait for the government’s green light to make your student loan payments.
In fact, it could be beneficial to start making regular payments (if you’re not doing so already) because the interest rate on federal loans is currently frozen at 0%, so any payments you make will go entirely toward the principal of your loan.
If you can pay more than your usual minimum, that’s also a smart idea (if you can afford it) as you’ll chip away at your loan balance.
If you’re saddled with other debt and not yet in a position to start repaying your loan, consider using this time to clean up your finances and potentially even tame your debt with the help of a lower-interest debt consolidation loan.
Find the best repayment pan
There are ways to clear out your student loan debt faster by switching up your current payment plan, particularly if your income went down during the payment freeze and still hasn’t come back.
The government offers income-driven repayment plans that allow you to make more affordable payments, based on what you earn. After you make 20 or 25 years of regular payments under an income-driven plan, your remaining student debt will be forgiven.
That might be your best shot at having some of your student loans canceled — especially if the Supreme Court rules against Biden’s student loan forgiveness plan.
One simple money-saving step with a federal student loan is to enroll in autopay because signing up for automatic deposits will qualify you for a 0.25% interest rate reduction when payments resume.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.