Millions of student loan borrowers are now preparing to pay back their debt without President Joe Biden’s forgiveness plan.
The Supreme Court tossed out the president’s relief program on Friday, which would’ve wiped out as much as $20,000 per borrower. That, combined with the return of monthly payments at the end of August, means many Americans are soon going to struggle to make ends meet.
The relief package was a signature Biden initiative to alleviate the $1.8 trillion student loan crisis. And while advocates are pushing for the administration to explore other options for forgiveness, any alternative strategies will likely take months or years. The largest chunk of federal student loans — some $636 billion held by 14.7 million people — belongs to borrowers aged 35 to 49.
The Supreme Court decision comes at a time when many prospective students and their parents are debating whether college is worth the cost as tuition prices soar while wages fall behind inflation. Some have postponed major life decisions while waiting out confusion over debt relief.
When monthly bills resume in two months, economists at Bank of America expect student loan delinquencies to return to pre-pandemic levels — 11.1% of borrowers were more than 90 days past due in the fourth quarter of 2019 — which would amount to $167 billion in newly “seriously” delinquent balances.
That would also increase total delinquencies across all categories of household debt by 67% from the first quarter, they said. Though household balance sheets are currently in good shape, a combination of high interest rates and the return of student loan payments could deal a “sizeable shock,” especially to consumer spending, the Bank of America economists said.
We talked to experts about what you need to know to get ready.
How can I prepare to make payments?
Payments on student loans were initially halted in March 2020, and the moratorium was extended several times in the past three years. Recently, as part of the agreement to raise the debt ceiling, the restart date was set for the end of August. That’s when interest will start accruing again and the first bills will be due in October.
The average student loan payment before the pandemic was about $400 a month, a significant chunk of most Americans’ budgets.
The first thing to do is check in with your loan servicer, which may have changed during the pandemic as some providers ended their contracts with the federal government. That can help you get an estimate of exactly what you’ll have to pay each month, said Marcus Holzberg, certified financial planner at Holzberg Wealth Management. You may also have to update your personal information and billing address.
Ryan Brueck, financial planner at ClearWealth in Iowa, recommends taking stock of your monthly expenses and how the new student loan bill will fit into that. This is especially important if there have been big changes to your finances, such as a new mortgage or car payment.
“It's best to look at where you sit right now and address any deficits or spending issues now so that you can make those payments comfortably,” he said.
What if I can’t afford the bill?
There are several income-driven repayment plan options to pursue if you don’t think you can afford the monthly payment. Under IDR, your payment is a percentage — currently 10% — of your discretionary income, which is any income you make over 150% of the poverty line based on your family size and what state you live in. Depending on your income, you might not have to pay anything at all.
You can also look into the Public Service Loan Forgiveness Program, which forgives the remainder of your loan balance after 120 qualifying payments. However, you have to work for a qualifying employer, and your monthly payment is based off income.
What should I do if I have other debt?
Financial experts generally recommend prioritizing debt with the highest interest rate first. Usually, that’s credit card debt, which can have rates above 20%.
“I would suggest comparing the interest rate, including any tax deduction benefit, to other debts,” said Tim Melia, financial planner at Embolden Financial Planning in Washington. “If there are other debts with higher interest rates, perhaps it makes sense to focus on paying the minimum and extra payments on those debts first and pay just the minimum on the lower-interest student loan debt.”
If you simply can’t afford all the payments, it might be wise to pay student loan bills over credit card bills, according to Julia Colantuono, owner of One Financial Design in Massachusetts. That’s because defaulting on student loans can result in having your tax refund withheld and also may jeopardize your social security retirement benefit.
What about investing?
Though many borrowers will struggle to make ends meet when payments return, at least some have been saving up spare cash, waiting to see if Biden’s forgiveness plan will proceed. Now that we have an answer, those individuals need to plan out what to do with the money.
Robert Stromberg, president of Mountain River Financial in Pennsylvania, recommends considering the interest rate on the debt, and asking yourself if you could generate a greater return by investing the money, while also making the minimum payments each month on your student loans. If so, and assuming you have the appropriate risk tolerance, you could put the money in a diversified portfolio of stocks and bonds.
“If you have a low tolerance for risk, are older, have higher interest rate debt or you already have a lot of money invested, you might be better off paying down the debt sooner with those excess dollars,” he said.
Gordon Achtermann, financial planner at Your Best Path Financial Planning in Virginia, recommends considering high-yield savings accounts and certificates of deposit too. Goldman Sachs Group Inc.’s popular Marcus account currently offers a 4.15% rate on its high-yield product, while its 13-month, no-penalty CD offers 4.35%. The best part is that if you change your mind, you can easily take the cash out and put more money toward your student loan balance.
This article was provided by Bloomberg News.