The past year was filled with what seems like an endless list of challenges, but there’s been at least one small reprieve: the pause on federal student loan payments. However, the COVID-19 federal student loan deferment period is coming to an end and payments will soon resume.
Student loans have become a bit of an afterthought for federal borrowers in administrative forbearance. Many borrowers are also in completely different financial situations than they were pre-pandemic. So, it’s natural that student loan borrowers are questioning what exactly will happen with their income-driven repayment (IDR) plans.
Here’s what to know when planning for your payments to resume after the federal student loan deferment ends.
How long are student loans deferred?
There have been several extensions of the federal student loan payment and interest freeze. The suspension was first put in place on March 13, 2020, and has since been extended by legislation and via executive order.
When do student loans resume? The federal student loan deferment period is set to expire on January 31, 2022.
2 considerations before the payment freeze is lifted
Even though you have a few months until payments resume, it’s best to start thinking about your student loans now. After all, it’ll have been a solid 18 months of no required payments by the time the suspension ends. Resuming payments could come as a bit of a financial shock, as many borrowers have used the freeze to pay off other debts or build their emergency savings.
Here are a few student loan-related items that should be on your radar.
1. Update your contact information with your loan servicer
Seriously, don’t sleep on this step. When payments restart, things are going to be hectic for borrowers and loan servicers. Expect initial confusion about when payments are due and when income recertification is required. Plus, contracts with some federal loan servicers will expire in December, which only adds to the chaos as borrower accounts are shifted to new loan servicers.
Update your contact information with your loan servicer as soon as possible. If you’ve moved during the payment suspension, changed your phone number, or created a new email address, you need to provide your loan servicer with your updated information. This will help ensure important student loan information is sent directly to you.
The Department of Education states you should receive a billing statement or notice at least 21 days before your payment is due. But its guidance on income recertification for IDR plans is vague. You aren’t required to recertify before the end of the forbearance period, even if your original recertification date rolls around before January 31. But the timeline that borrowers have to recertify is unclear.
Instead, StudentAid.gov states, “…your recertification date has been pushed out from your original recertification date. You will be notified of your new recertification date before it is time to recertify.”
We’ll keep you updated as developments come out, but your loan servicer will have details related to your exact loans.
2. Time your recertification based on your income
Start considering whether your financial situation will be better or worse when the federal student loan deferment period ends. Then, time your income recertification accordingly.
What does this mean?
As mentioned earlier, you aren’t required to recertify your income before the administrative forbearance ends. But you might want to if it benefits you for the next 12 months of payments.
Let’s say your hours (and income) were cut due to the pandemic, but your pay will return to normal in the next several months. Remember, IDR payments are based on a percentage of your discretionary income. Therefore, it would be in your best interest to go ahead and recertify early while you have a lower income level.
However, if your income increased, then you’ll want to wait as long as you can to submit your recertification documentation. Once you recertify, your monthly payment is recalculated to reflect your higher income.
Repayment options after the federal student loan deferment ends
When the federal student loan deferment period ends, you’ll have to figure out how you want to handle your repayment. Here are some options to explore.
Option 1: Do nothing and let payments resume
If you don’t do anything, then your payments will begin on the same repayment plan as it was prior to forbearance. Automatic payments will resume, and the payment amount will be the same as before.
You’ll still need to recertify your income by your new required recertification date. However, this approach could squeeze out some extra months of lower payments if your income increased during the pandemic.
Option 2: Keep your IDR plan and recertify your income ahead of schedule
You can recalculate your monthly payment by recertifying your income earlier than required. This is most beneficial for borrowers who’ve lost their job or been furloughed because they’ll likely have a much lower income than they will in several months.
You’ll need to provide evidence of your financial situation, such as a termination letter or proof of unemployment benefits. But if you’re stuck being unemployed in the aftermath of the pandemic, you might as well capitalize on it now and secure a year’s worth of lower student loan payments.
This approach can also benefit borrowers who had a child during the payment suspension because family size is another major factor in determining your IDR payment.
And don’t worry about recertifying early as you won’t have to start making payments until the payment suspension ends.
Option 3: Switch to a different repayment plan
If you’re concerned about not being able to afford your monthly payment on your current plan, you can explore other repayment plan options.
For example, let’s say you’re currently on the Income-Based Repayment Plan (IBR) that uses 15% of your discretionary income to determine your monthly payment. If you switch to the Pay As You Earn Plan (PAYE), your payment will be based on only 10% of your income.
Borrowers who are currently on the standard, graduated or extended plan might be considering applying for additional deferment or forbearance if they can’t afford payments. If you find yourself in this situation, you’ll benefit more from enrolling in an IDR plan. You’ll begin receiving credit toward loan forgiveness and your payments could be as low as $0 per month.
Option 4: Refinance if you plan on paying off your student debt in full
Refinancing lenders are offering great interest rates and generous cash-back bonuses right now. If you have any private student loans, you should definitely shop around for a better interest rate. However, if you have federal student loans, you’ll need to weigh the pros and cons of refinancing before moving forward.
When you refinance, you’ll lose access to federal borrower protections (e.g. deferment and forbearance options) and you won’t be eligible for loan forgiveness programs or flexible IDR plans.
But if you plan to eventually pay off your full federal student loan balance, then refinancing is a great option to help you become student debt-free faster.
Make a plan before payments resume
Don’t wait until October to figure out your plan for repaying federal student loans. Be proactive and contact your loan servicer directly to answer any lingering questions you might have or reach out to us.
If you’d like more customized guidance that factors in your financial and personal goals, schedule a one-hour consultation. Our student debt experts can help you time your recertification and implement a number of other repayment strategies to save you money on your student loans.