Student loan borrowers in the United States are facing challenges in resuming their payments. According to data from the U.S. Department of Education, only 60% of individuals with federal education loans had made a payment by mid-November. The high number of borrowers struggling to make payments is not surprising, given that many were already facing difficulties before the pandemic hit. With outstanding education debt in the country surpassing $1.7 trillion, it has become a greater burden on Americans than credit card or auto debt.
In recent years, the average loan balance at graduation has tripled since the 1990s, increasing from $10,000 to $30,000. A significant percentage of student loan borrowers (around 7%) owe more than $100,000. The Biden administration recognizes the need to address this issue and is implementing a 12-month “on ramp” to repayment to help borrowers transition back to making payments. During this period, borrowers are given some protection from the consequences of falling behind on their payments.
For struggling borrowers, there are several options to consider. Experts recommend first exploring deferment possibilities. A deferment may prevent loans from accruing interest, unlike forbearance, which usually comes with interest accumulation. Unemployed borrowers can request an unemployment deferment, and those experiencing financial challenges may be eligible for an economic hardship deferment. Hardship deferment qualifications may include receiving certain types of federal or state aid, as well as volunteering in the Peace Corps.
There are also lesser-known deferments available, such as the graduate fellowship deferment, military service and post-active duty deferment, and cancer treatment deferment. It is important to note that undergraduate subsidized loans generally do not accumulate interest during hardship and unemployment deferments, but other loans do. Depending on the type of deferment, the maximum time limit usually ranges from one to three years.
If deferment is not an option, borrowers may request a forbearance. With forbearance, borrowers can temporarily pause their loans for up to three years. However, it is crucial to keep in mind that interest continues to accrue during this period, leading to a larger repayment amount once the forbearance ends. For example, a $30,000 loan with a 5% interest rate would increase by $1,500 per year under forbearance. It is advisable for borrowers considering forbearance to try and make at least interest payments during the pause to prevent their debt from growing further.
Instead of relying on deferment or forbearance, experts recommend finding a payment plan that is affordable. Income-driven repayment plans can be an excellent option for borrowers concerned about their ability to afford monthly bills. These plans set monthly payments at a percentage of discretionary income and offer forgiveness of remaining debt after 20 or 25 years of consistent payments.
The Biden administration has introduced a new repayment option known as the Saving on a Valuable Education (SAVE) plan. Under this plan, borrowers may only have to pay 5% of their discretionary income towards their undergraduate student loans, with some individuals qualifying for a $0 monthly bill. However, some benefits of the SAVE plan will not take full effect until the summer of 2024 due to regulatory changes.
If you are unsure about which repayment plan is right for you, you can use online calculators available on websites like Studentaid.gov or Freestudentloanadvice.org. These calculators can help you determine how much your monthly bills would be under different plans based on your income and loan amount.
Struggling with student loan payments can be overwhelming, but there are options available to ease the burden. Deferment, forbearance, and income-driven repayment plans can provide temporary relief for borrowers facing financial difficulties. It is crucial to weigh the pros and cons of each option and choose the one that best fits your circumstances and long-term financial goals. By exploring these alternatives and staying informed, you can navigate the challenges of student loan repayment more effectively.