Repayment of student loans is set to resume in October after a pandemic-related break of over three years. However, many borrowers are expressing financial unpreparedness or lack of awareness regarding the resumption of payments. The consequences for borrowers who do not resume payments in October may not be severe initially, as the Biden Administration is implementing an “on-ramp” program to ease the financial burden for the 44 million borrowers in the country. This on-ramp program, announced on June 30 due to the Supreme Court blocking President Joe Biden’s student-debt forgiveness program, will provide borrowers with a one-year grace period for missed payments.
Persis Yu, the deputy executive director at the Student Borrower Protection Center, emphasized the necessity of providing relief for borrowers, as most Americans cannot suddenly afford the monthly payments that often amount to hundreds of dollars. Unfortunately, only 30% of borrowers are aware of when their payments are due to resume, while nearly half admit to being financially unprepared to start repaying their debt, according to a recent survey by U.S. News & World Report.
Student loan interest will begin accruing on September 1, and loan repayments will commence in October. The “on-ramp” program for student loans is a one-year leniency initiative starting on October 1, 2023, and lasting until September 30, 2024. The program aims to help borrowers avoid severe consequences resulting from missed, partial, or late payments. Borrowers who miss or are late in their payments will not face credit reporting or default status, and their loans will not be sent to collection agencies. Yu highlighted that borrowers will automatically enter this forbearance program without needing to take action.
However, borrowers should consider the long-term financial implications before deciding to skip repayments. Although the harshest consequences of missed payments will be waived until September 30, 2024, interest will continue to accumulate during the on-ramp period. Yu pointed out that balances will grow if payments are not made, meaning borrowers will have higher debt come September 2024.
Experts advise against skipping payments if borrowers qualify for the Saving on a Valuable Education (SAVE) program. SAVE is an income-driven repayment plan that pegs monthly payments to borrowers’ income. The program, which recently opened through a beta application, can reduce monthly payments by half or even down to $0. The Biden administration estimates that many borrowers will save up to $1,000 annually through this program. For borrowers whose monthly payments would be $0 under SAVE, enrolling in the program would be more beneficial than relying on the on-ramp program since interest does not accrue for those in an IDR program.
Overall, understanding the dynamics of these programs and weighing the options is crucial for borrowers. It’s important to note that while the on-ramp program incurs interest, borrowing under the SAVE program will not, despite having a similar impact on monthly budgets.
In conclusion, there are alternative options available for borrowers who cannot afford to immediately resume loan repayments. The on-ramp program provides temporary relief, but the SAVE program may offer greater assistance, particularly for those whose payments would amount to $0. Borrowers should carefully consider their financial situations and make informed decisions regarding repayment.
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