Americans with federal student loans will soon have to start paying them back again — for real this time.
A repayment grace period rolled out by President Joe Biden is set to conclude at the end of September, smack in the middle of a contentious presidential election. The policy has been shielding borrowers from the worst repercussions of missed payments for the past year. Its end will likely squeeze millions of wallets across the US, given more than 40 million Americans have federal student debt.
Borrowers have already spent the past two years whipsawed by forgiveness proposals. Many of the most recent student-loan policies and programs were created through executive action, meaning a change in the Oval Office could have dramatic effects.
“With this being an election year, it’s going to feel a little bit like being on a roller coaster ride,” said Andrew Paulson, student loan consultant and co-founder of StudentLoanAdvice.com. “Everyone’s asking what will happen, but I tell them you have to go off the facts we know today. There are a lot of things that are proposed, but a lot of it won’t gain traction.”
Here’s what you need to know:
How did we get here?
Federal student debt has more than doubled since 2010, reaching about $1.6 trillion as the cost of higher education skyrocketed. Beleaguered borrowers got a reprieve during the Covid-19 pandemic when the government paused mandatory payments.
Repayments restarted last October after a three-year pause, but the Biden administration simultaneously introduced a one-year leniency program for those struggling with their debt. While interest still accrued during the period, borrowers who missed payments weren’t considered delinquent, reported to credit bureaus or placed in default. They also weren’t referred to debt collection agencies, and the accrued interest wasn’t added back to principal of their loans.
Those are the benefits slated to end on Sept. 30.
Biden featured the idea of loan forgiveness heavily during his campaign for president, then in 2022 introduced a plan that would have canceled up to $20,000 per borrower for those under a specified income threshold. The Supreme Court struck down the plan last year in a ruling that said his administration was “seizing the power of the legislature” by trying to erase student debt.
Biden has been trying to chip away at student loans through other avenues in the wake of that decision. Changes to existing federal programs allowed more people to qualify for debt relief, especially those who have made payments for 10 to 25 years. So far, the Education Department has forgiven $168.5 billion for almost 5 million Americans.
What’s happening now?
A legal battle between Republican-led states and the Education Department is creating turmoil for the Saving on a Valuable Education (SAVE) plan, a Biden administration program that calculates loan repayments based on borrowers’ incomes instead of their debt balances. It was rolled out in several waves and now counts some 8 million participants.
The plan initially set repayments at 10% of a borrower’s income above a certain threshold and was slated to be reduced to 5% in July. But a district court in Kansas temporarily stopped the change, and then a July appeals court ruling blocked it entirely. The Education Department has placed borrowers already enrolled in the program on administrative forbearance, meaning they don’t have to pay their loans as the agency sorts out its next steps.
Any further student-debt forgiveness through the SAVE plan is on hold and the portal to apply is offline.
In total, the administration has incrementally forgiven federal student loan debt for more than 1 in 10 borrowers. The bulk of efforts have been directed toward those enrolled in the Public Service Loan Forgiveness program, certain income-driven repayment plans and borrowers who were defrauded by their schools.
What should I look out for next?
Make sure you know how to contact your servicer, which may have changed during the pandemic. The sooner you check your loan balance and weigh your options for repayment, the sooner you can apply for a program to help alleviate the burden if you need one.
Scott Buchanan, executive director of the interest group Student Loan Servicing Alliance, said he expects to see delinquency rates rise much the way they do for recent graduates, who typically begin paying their debt back six months after leaving school.
“What I worry about most is that through a long payment pause and this on-ramp, we haven’t encouraged people to become engaged on their loans,” Buchanan said. “A lot of people just have thrown up their hands and said: ‘Well, listen, I'll wait until they really, really make me pay — and then I'll think about it.’”
This article was provided by Bloomberg News.