The pandemic hit the economy leading many borrowers to struggle with debt repayment. Luckily, the government took care of federal student loan borrowers and paused repayment for some period. As a part of the $2 trillion worth CARES Act to help the economy recover, the Trump Administration deferred the repayment with a 0% interest rate. Next, when Biden became the president, he also extended this loan forbearance/deferment process for around a year. Currently, it is expected that the pause on debt collection will end in February 2022. It means that massive debt repayment operations will resume all over the country only a few months later.
What Happened in 2021?
Many borrowers were concerned that their debt collection would resume in January 2021, when it was set to expire. Yet, as a part of his first presidency actions, Biden extended the debt repayment forbearance period by eight months. It means the non-repayment period was again expected to end in September.
At that time, some assumed that the Biden Administration would facilitate the non-collection process, but for a few months. None knew that Biden would extend this benefit for such a long period. Such an extension decision helped more than 40 million borrowers in the United States. Later, people hoped that Biden would also offer forgiveness to borrowers. However, there are still no announcements that Biden cancels student debt.
Yet, the Biden Administration again decided to prolong the pause on debt collection till January end, 2022. The government defined this extension as the “final” period of student loan relief. The Education Secretary noted that this final extension should be a good opportunity for borrowers to plan their repayment.
If the repayment is going to resume in February 2022, borrowers should have a solid plan to cope with the debt repayment.
What does Pause on Repayment Mean?
Before we discuss how to prepare for the period after student loan relief, let’s discuss what the pause on repayment offers to borrowers. Generally, it is not mandatory for federal student loan borrowers to make debt payments throughout the forbearance period. These loans are usually Direct and Direct PLUS loans.
Around 15% of federal loan borrowers could not benefit from non-repayment because of having a different type of loan. Besides, unfortunately, this decision did not cover private loan borrowers. Hence, they need to continue repayment even if the pandemic affected their finances, too.
Usually, the loan forbearance or deferment process can still lead to the accumulation of interest payments. If the borrowers do not make interest payments, these balances are added to the original balance, which is undesirable. Luckily, the government set interest rates to 0% during the pause on debt collection. As a result, no interest payments were incurred or accrued.
The non-repayment period does not prohibit payments. If your finances are satisfactory, you can still pay your debt to save money from interest. Besides, if you are in a student loan rehabilitation program, the non-repayment period still qualifies for this benefit.
Additionally, debt repayment suspension happens automatically. It means the borrowers do not need to take further actions to stop their repayments.
Public Service Loan Forgiveness during Non-Repayment
The Public Service Loan Forgiveness program grants complete debt cancellation to borrowers who make 120 qualifying payments. Borrowers working in the public sector can apply for this program.
The pause on debt collection might worry borrowers who should make monthly payments. However, the government also considered these debtors. The non-collection period does not create any issues for borrowers to progress toward PSLF. Each month still qualifies for the forgiveness process.
Non-Repayment Period from Government’s Perspective
The government’s efforts to help borrowers in these challenging times are constructive. For example, due to a pause on debt collection, more than 40 million borrowers could deal with their debt struggles. Yet, this non-repayment period is also necessary for the government to develop a solid plan.
In the case of natural disasters, like hurricanes, usually, the default rates spike. Even after the event, the borrowers cannot deal with their finances effectively, contributing to higher default rates. Such a non-repayment period allows the government to develop a plan which will enable them to resume the debt collection operations smoothly. After a long period of non-collection, the loan servicing companies should be instructed carefully so that no borrower struggles with technical errors. Considering that there were significant changes in serving the federal loans, the transition is not expected to be effortless.
Changes in Loan Servicing Companies
2021 was full of significant events for federal loan borrowers. First, Biden prolonged the non-repayment period for multiple months. After such bold action, many people asked, “will Biden Cancel Student Debt?” which unfortunately did not happen. One of these events is the changing of loan servicers. Multiple loan servicers announced that they would not renew their contracts with the Education Department. As a result, loan servicers will need to change for around 14 million borrowers.
Now, picture the situation; massive debt collection starts after a few months. It is hard enough to handle the resuming operations for borrowers. As if it is not challenging enough, the loan servicers who have dealt with these accounts for years decide to quit.
Therefore, new loan servicers having limited experience with massive federal student loan accounts are expected to keep the account transfers and start the repayment process “smoothly.” That is why you need to develop a better repayment plan, as it is not a viable option to rely solely on loan servicers. So here are the expected changes:
Navient is currently servicing around six million federal loan borrowers. At the beginning of the fall, the company announced that it was quitting its loan servicing position. Instead, Navient offered the transfer of federal loan accounts to another company called Maximus. Maximus will do the business as ‘Aidvantage.’ The Education Department accepted this offer. Keep in mind that only government-backed loans will be subject to transfer. The transfer does not involve private loans or FFEL loans.
Another company that announced its quitting is FedLoan Servicing. This loan servicing company is mainly responsible for managing borrowers who progress for Public Service Loan Forgiveness. The company handles around eight million borrower accounts.
It was expected that FedLoan would transfer all accounts to another company called MOHELA. Some borrowers have already started dealing with MOHELA. However, later, FedLoan Servicing announced that they would renew the contract for one more year. When their contract is about to expire, they will transfer all accounts to others like MOHELA, Nelnet, or Great Lakes Higher Education.
Are the Borrowers Ready for Repayment?
If the debt collection resumes in February, the main question remains: are the borrowers ready for repaying their debt obligation? Recent research by the Student Debt Crisis Center reveals the opposite. Around 89% of the respondents mentioned that they were not ready to resume the repayment. Meanwhile, 10% of respondents noted that they would pay 50% of their income for the debt obligations.
The President and Founder of this center added that even if the borrowers are fully employed, most are still not financially stable to repay the debt.
Besides, if you are one of the borrowers wondering, “will Biden cancel student debt?” it will not happen soon. So, start preparing your finances for upcoming debt repayment.
So, How to Prepare for the End of Student Loan Relief?
With the recent studies, the future does not seem bright for student loan borrowers. Although advocates of student loan relief, like Sen. Elizabeth Warren, note the importance of extending the pause on debt collection beyond January 31, 2022, the Biden Administration mentioned that it is the final extension. So, it is time for borrowers to get ready for repayment.
Talk to Your Loan Servicer
Usually, one recommended action for financially struggling borrowers is contacting their loan servicer. Loan servicers are third parties between the borrower and the Education Department. These companies can guide the borrowers through different debt management strategies. If you face any debt-related challenges, you can contact them and get help.
However, as mentioned before, currently, some loan servicers have changed. It means they already have a huge workload. Besides, some borrowers sued loan servicers during recent years due to poor service or misleading them. Hence, it is not advisable to rely on the loan servicers entirely in such a complicated situation. Furthermore, do not forget that they can also make mistakes which might cost you time and money. Therefore, it is more beneficial to know all your options before talking to a loan servicer.
Student Loan Refinancing
If you look for ways to reduce your interest payments, student loan refinancing can be a great option. Unlike many other options, like student loan forgiveness, it is easier to get refinancing loans. Refinancing works in the following way; borrowers get a new loan, preferably with better loan terms.
Then, they use the funds to pay off their existing, more expensive loans. As a result, the borrowers save money from interest payments. However, finding a refinancing loan with a lower interest rate or monthly payments is necessary for this strategy to work.
One of the benefits of this solution is that it is available to both federal and private student loan borrowers. Moreover, refinancing can take a short time if you are in financial trouble.
If you want to refinance a student loan, you should have a stable income and good credit performance. Usually, a score of 650 or more is necessary to qualify for better interest rates. If you lack these eligibility requirements, you can get help from a co-signer. Co-signers are third-party people responsible for payment if you do not repay the debt. They can be friends or family members.
Co-signers should also meet the mentioned eligibility conditions. In case of non-repayment, their credit history will also be damaged.
When Refinancing is a Good Idea?
Refinancing is an effective debt management strategy if utilized under the right conditions. As mentioned before, your new refinancing loans should have better terms like decreased interest rates. Such benefits can be achieved by improving your credit score after your first loan. For example, many borrowers get loans while in school, and their credit performance is not high. If, after getting a job, your credit performance is enhanced, you can qualify for lower interest rates.
Besides, economic factors matter. For example, sometimes, the market interest rates start to decrease. However, if you have already got your loan, these decreased rates do not impact your repayment. Therefore, you should renew your loan to benefit from the reduced rates.
Additionally, if you have variable-rate loans and want to get a fixed-rate debt (or vice versa), you can take advantage of refinancing loans.
When Refinancing is not a Good Idea?
The main disadvantage of student loan refinancing is losing eligibility for federal student aid. So, if you have federal loans, you should think twice before refinancing your loans. Instead, you can enroll in more affordable loans or get forgiveness.
For example, the pause on debt collection during the pandemic only covered federal loans. In the case of refinancing, you will not enjoy such benefits in case of emergencies.
Income-Driven Repayment Plans
Besides refinancing, if you have federal loans, you can consider moving to Income-driven repayment plans. These repayment options are based on your family size and income level. Hence, you will qualify for lower monthly payments if your earning level decreases during the pandemic. Enrolling in this plan is usually the most popular recommendation to borrowers with financial struggles.
In addition to providing affordable repayment, Income-driven plans also bring forgiveness. Once the repayment period is completed, your remaining debt will be canceled. It usually takes around 20-25 years to pay off student loans through Income-driven repayment options.
The Income-driven repayment options have several types. Each plan has its debt collection period and payment rate. The payment rate is calculated as a percentage of discretionary income. Discretionary income is left after deducting taxes and other necessary spendings from the earning. Hence, it is easier for borrowers to repay the debt. Generally, 10-15% of discretionary income is a requirement. You can check each option and choose the most suitable one for your finances.
Student Loan Forgiveness
You might also look for ways to get student loan forgiveness. Sure, it is not easy to qualify for forgiveness. However, if you are waiting for the news that Biden cancels student debt, you might waste a long time. Although the massive forgiveness discussions have been all over the news since Biden became the president, he did not support this idea. Instead, the Biden Administration grants targeted loan forgiveness. It means you can get forgiveness through some specific programs.
For example, Borrower’s Defense to Repayment is one of the most popular programs that received much attention from the Biden administration. You could qualify for this program if your school misled you. For example, if the school officials lied to you about debt costs, job replacement rates after graduation, or education quality, you can apply to this program. As a result, you will get partial or full debt forgiveness after debt collection.
We advise you to check different loan forgiveness programs, like Teacher Loan Forgiveness, Closed School, or Disability Discharge, to determine which one you might qualify for.
Update Your Personal Information
As you did not pay your debt obligations for a long time, your contact information or address can be outdated for loan servicers. So, please, make sure that you update your phone number, address, email details with the loan servicer so that they can inform you about any changes.
Probably, the Education Department will contact you when it is time to resume debt collection. Besides, if your loan servicer changes, you need constant communication to monitor debt operations.
Get an Expert Help
Besides getting familiar with your options, we advise you to get expert help to prepare for debt collection. Student loan specialists, like those in Student Loans Resolved, have helped thousands of borrowers like you. Our experts can analyze your finances and find the most suitable option for your debt challenges. Sure, it is good to know your debt management strategies, but only experts can anticipate the impact of these solutions on your debt concerns.