American student loan debt has soared to $1.774 trillion, more than the $1.031 trillion total for credit card debt in the United States. Interest accumulation and payments were paused for the past few years because of the COVID-19 pandemic. However, student loan payments will resume in October, and many are not ready.
The high expense of college means student loans permit many to attend college who otherwise might not have had the opportunity because of financial limitations. In many cases, the loans allow a person to complete an undergraduate or graduate degree leading to a job.
But this opportunity comes with a price. Students graduate with tens of thousands of dollars of debt that must eventually be paid back. The aggregate loan value has risen quickly from about $520 billion in 2006 to nearly 2 trillion dollars today.
On September 1st, the reprieve on interest and repayment for student loans ended. Interest is accumulating once more. Subsequently, loan repayments commence in October.
The Majority of Students Graduate with Loans
High college costs mean 51.8% of those who complete an undergraduate degree use a federal loan to pay for some or all their educational expenses. The percentage is greater for graduate students, especially those who finished master's or professional doctorate degrees.
The average federal student loan balance has climbed to $37,717, which is probably slightly higher if private debt is added to the total. The debt balance varies depending on the degree earned. People with bachelor's degrees owe an average of $21,566. Those with a graduate degree must repay an average of $102,400.
Interest rates vary for loans depending on the source, type, and purpose. Loans directly to undergraduate students typically have the lowest rates. Additionally, subsidized loans are more favorable than unsubsidized loans because interest does not accrue during school, deferment, or grace periods.
Effects of COVID-19 on Student Loan Repayments
Because of the COVID-19 pandemic, the federal government paused student loan interest accumulation and repayments for more than three years.
It started with a temporary six-month forbearance early in the pandemic, on March 13, 2020. Since then, the pause was extended nine times because the President had the authority to do so in a national emergency.
However, borrowers should not expect another extension and should prepare for when student loans resume their payment schedule next month.
When Do Student Loan Payments Resume
In May this year, Congress passed the debt ceiling bill that included a provision to end the federal student loan repayment hiatus. When signed in June, the bill called for student loan interest and payment schedules to resume 60 days after June 30, 2023. Consequently, federal student loans began accumulating interest on September 1st.
To ease the pain of transition, the Biden administration set a 12-month period for borrowers to adapt to resuming student loan payments without the risk of default or entering collections.
A Transition Period Eases the Burden for Borrowers
This staged approach means the interest accrues starting on September 1, and the first payment is due in October for the nearly 44 million people with federal loans except those in their grace period for other reasons. The dollar amount and exact due dates are dependent on each individual loan term.
Borrowers have until September 30, 2024, before they are considered delinquent for missing a payment. In addition, the Department of Education developed a new income-driven repayment (IDR) plan called the Savings on a Valuable Education (SAVE) program that may reduce monthly payments for those who qualify. After a 3-1/2 year break, many debtors will face challenges when student loans resume.
Determine The Amount Owed and Monthly Payment
Three-and-a-half years is a significant amount of time in today’s banking world, and companies managing a specific loan may have changed.
Check the Department of Education’s Federal Student Aid website to identify which firm is servicing your debt. Update your contact information, check the total amount owed, and the monthly payment and due date. You’ll need this to create an updated strategic approach to your budget.
Prepare a New Budget Strategy
Millions of borrowers have likely become used to more cash flow for other expenses. Dawn Maybery Chestnut, CFP of Maybery Consulting, tells Dividend Power, “Understand your payment amount, due date, and how to pay. Adjust your budget to accommodate this fixed expense.”
Explore Income-Driven Repayment Plans
For eligible borrowers, alternative payment plans may lower monthly payments and even lead to debt forgiveness. An IDR plan reduces monthly payments to a fixed percentage of discretionary income. Depending on income, the new payment could also be as low as $0.
The new SAVE plan replaces the current REPAYE plan. Check the federal loan payment simulator to compare plans before you proceed. Borrowers should also talk to a financial planner to understand the workings of the latest IDR plan.
Prepare Ahead of Time for When Student Loans Resume
According to Michael Acosta, CFP, of Genesis Wealth Planning, LLC, “There is a lot to consider when making financial decisions that can positively or negatively impact what borrowers are required to pay…before making any decisions or changes with your student loans make sure you're educated.”
Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor and blogger on dividend growth stocks and financial independence. Some of his writings can be found on Seeking Alpha, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, Entrepreneur, FXMag, and leading financial blogs. He also works as a part-time freelance equity analyst with a leading newsletter on dividend stocks. He was recently in the top 1.5% (126 out of over 8,212) of financial bloggers as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.