The clock is ticking on a roughly $1.6 trillion pile of student loans.

A grace period for federal borrowers ended this week, kicking off a countdown to real financial consequences for those behind on their bills. The moment caps a forbearance odyssey that stretches to the early days of the Covid-19 pandemic, when payments were initially paused by the Trump administration as part of a broad effort to stabilize the economy.

Failed forgiveness proposals and ongoing legal fights over repayment plans have left indebted graduates confused — and sometimes fed up — with the status of their loans. Many assumed President Joe Biden would make good on his 2020 campaign promise to wipe out the debt. For most, it didn’t happen, and now they must grapple with their financial realities.

Mark Claudio, a 30-year-old in New York who has about $23,000 in federal student loans, is annoyed the Biden administration forgave the debt of some students but not others. And even if he did start paying his $500 monthly bill, Claudio feels it would barely make a dent. He could simply keep the money and watch his credit score suffer instead.

“I’ve been getting emails to start repayment again, and I’m really torn,” said Claudio, who works in video production. “I don’t want to have that on my credit score, but at the same time it would be really nice to not pay it.”

Claudio’s deliberation is one shared with millions of other borrowers across the US. After more than four years of forbearance, and various forgiveness proposals, there’s a sense of fatigue and confusion among many borrowers. Add in that the risk of nonpayment is mostly contained to one’s credit score, and some are left to wonder if paying down federal loans is, maybe, for suckers.

Federal student loan payments were initially paused early in the pandemic, and technically restarted a year ago. But a 12-month grace period was put into effect. That meant interest still accrued on those debts, but borrowers not making payments weren’t considered delinquent, reported to credit bureaus or placed in default. According to the Government Accountability Office, about 10 million borrowers — more than one-quarter of the total — were behind on their student loan bills as of earlier this year.

There’s still a little wiggle room even after leniency ends — delinquencies aren’t reported until they’re 90 days past due, according to Liz Pagel, senior vice president of consumer lending at TransUnion. So if a borrower misses their October bill and they still don’t make payments in November or December, their credit score likely won’t get hurt until January.

Many consumers don’t know how this works, though, and forgiveness proposals have changed several times. After the Supreme Court struck down Biden’s plan to cancel up to $20,000 per borrower, his administration turned to other tactics like changing existing federal programs to allow more people to qualify. Those efforts have wiped away about $168.5 billion for almost 5 million Americans.

‘Bunch of Confusion’
The piecemeal approach has left many wondering whether their loans might be forgiven after all. What’s the use in restarting payments if it all might change again?

Zamir Baez, a 28-year-old with about $8,000 in federal student loans, hasn’t made a payment since before the pandemic and has been waiting to see if his debt will be wiped away.

“It’s a bunch of confusion,” said Baez, who works in lab operations in Boston. “I don't want it to impact my finances, but it’s also not clear what the consequences will be to not making payments.”

While no financial adviser would recommend missing payments, the credit score hit will ding some more than others. A lower credit score will make it harder to get financing for a home or auto loan, but probably might not affect many borrowers’ day-to-day lives, said Scott Buchanan, executive director of the interest group Student Loan Servicing Alliance.

Still, the complexities of the current student loan situation mean that many people don’t understand the status of their loans, said Betsy Mayotte, president of the Institute of Student Loan Advisors.

“The problem is that a big indicator of people successfully managing student debt is getting into the habit of making payments,” she said. “What the Covid pause did is take a whole bunch of people who were in the habit of making payments out of the habit.”

Legal Battle
Adding to the chaos is the legal battle over the Saving on a Valuable Education (SAVE) plan, a Biden administration program that calculates loan repayments based on borrowers’ incomes. Following challenges from Republican-led states, the Supreme Court in August refused to reinstate it, and the Education Department then placed borrowers already enrolled in the program on administrative forbearance. That means about 8 million people don’t have to pay their loans for now, with no interest accruing.

For Victoria Lockwood, a teacher in Virginia who’s enrolled in the SAVE plan, not having to make payments is a relief. The 37-year-old has about $23,000 in federal student loans, and her monthly bills had reached as high as $260 a month before the SAVE plan started, which was tough to afford on her salary.

“I think what Joe Biden's administration has done has been great,” she said. “But I’m a little frustrated that it’s been such a mess in the courts and legally. It makes it really hard to understand what's happening and how it’s affecting what I need to do.” 

This article was provided by Bloomberg News.