Changes to the Student Loan Program

Many people who want to buy a home have student debt that is hanging over them, making it more difficult to qualify for a home mortgage.   The student loan program has been on a COVID suspension for the last 42 months, but interest begins to accrue in September and repayments begin in October.  The changes to the student loan program will affect many borrowers. To help borrowers with this transition, the Biden administration has provided some leeway for the first year after payments begin. Here are four things to know as the monthly bills start to arrive:

If  someone with student loan debt can make an on-time payment, they should absolutely should. But if the borrower misses a bill or two, there will be some wiggle room — at least for the first year after repayment begins.  The Biden administration has provided a yearlong “on-ramp” to help ease borrowers back into the repayment routine.

So if the borrower miss a monthly payment from Oct. 1 to Sept. 30, 2024, the loan won’t be considered delinquent. The borrower also won’t be reported as such to the credit bureaus, placed in default or reported to debt collection agencies.

lTheoan servicer will automatically put any missed payments in forbearance, which, in this case, means they will be tacked on to the end of the loan term. Interest will also continue to accrue on the missed payments. But to avoid a big payment at the end of the term, the extra interest may be added to the ongoing monthly bills, to ensure the pay your loan off on time.)

If someone is enrolled in an income-driven repayment plan and miss a payment, however, the payment generally won’t increase (since payments are based on income and family size).  This first of the changes to the student loan program should allow borrowers to ease back into making their payments without a huge increase in their stress level.

As part of the changes to the student loan program, the Biden administration recently opened up its more affordable income-driven repayment plan, SAVE, which pegs the size of  monthly payment to income and family size. The SAVE plan is expected to generate the lowest monthly payment for most borrowers, which means it’s likely to be the best option for those in financial distress. The plan also treats interest differently: If the regular payment isn’t enough to cover the interest owed at that time, the unpaid interest is automatically erased. That means those who religiously make their payments will not see their balances grow over time, which has happened to many borrowers, leaving them discouraged. There are several other repayment options to consider besides SAVE, including the standard repayment program, which spreads payments over 10 years. Since everyone’s circumstances are different, the first stop should be the loan simulator tool at StudentAid.gov, which can help calculate which plan makes the most sense using the borrower’s specific loan details.

Borrowers who fell into default before COVID have received a fresh start and are considered current on their payments.  That means they can enroll in SAVE or any other repayment plan.  However, they need to take certain steps before next September to keep their loans out of default for the long term.

Here’s how: Contact the Education Department’s Default Resolution Group — by phone, online or mail — and ask to have the loan taken out of default through the Fresh Start program. The default group can also help the borrower enroll in an income-driven repayment plan, including SAVE. The group will transfer the loans to a regular loan servicer and wipe the record of default from the borrower’s credit report. The servicer will then put the borrower into an income-driven repayment plan with the lowest available payment based on the borrower’s eligibility.

Perhaps the most important of the changes to the student loan program is that roughly 800,000 federal student loans, totaling $39 billion, are in the process of being canceled. The White House’s initiative was designed to address past errors made by loan servicers that failed to give payment credit where it was due — or that may have provided poor advice when borrowers called for assistance.

Many borrowers have already been notified that their balances have been canceled, a process that will continue through the end of the year. After that, borrowers who don’t yet have enough qualifying payments for cancellation will receive their updated payment counts, pushing them closer to the loan term’s finish line.