The student loan payment pause and interest waiver has expired, and repayment will restart in the fall.
What options are available for financial relief if you still do not have a job or are still struggling to repay your student loans?
The payment pause and interest waiver, which began on March 13, 2020, suspended the repayment obligation on federal student loans held by the U.S. Department of Education. This included all loans made under the William D. Ford Federal Direct Loan Program (Direct Loans) and some loans made under the Federal Family Education Loan Program (FFELP). The interest waiver sets the interest rate to zero for the duration of the payment pause.
The Fiscal Responsibility Act of 2023, also known as the debt ceiling deal, requires repayment to restart 60 days after June 30, 2023. There will be no additional extensions to the payment pause and interest waiver. Interest will start accruing on September 1, 2023, and the first payments will be due in October of 2023.
By the time repayment restarts, borrowers will have benefited from 42 months of paused payments on their federal student loans. On average, these borrowers will have saved about $5,000 in waived interest on their loans.
Student and parent borrowers will have several options for financial relief after the payment pause and interest waiver ends.
It is important to start talking to your loan servicer about your options a few weeks before the end of the payment pause and interest waiver to make sure your loans will be placed in the right option for you. (Even if you plan on restarting payments, you should contact the loan servicer to update your bank account information if you signed up for AutoPay, where your monthly loan payments are automatically transferred to the lender.)
Deferments and Forbearances for Federal Student Loans
Economic Hardship Deferment. Borrowers are eligible for the economic hardship deferment if they are receiving public assistance (e.g., TANF, SSI, SNAP and state general public assistance), volunteering for the Peace Corps, or working full time and earning less than the federal minimum wage ($7.25 per hour) or the borrower’s income is less than 150% of the poverty line.
Unemployment Deferment. Borrowers are eligible for the unemployment deferment if they are receiving unemployment benefits. They are also eligible if they are unemployed and looking for a full-time job. Borrowers must not have turned down any full-time job, even if they are overqualified for the position.
Forbearance. A general forbearance is provided at the discretion of the loan servicer. General forbearances are typically provided when the borrower is experiencing financial hardship. A mandatory forbearance is also available for borrowers whose student loan payments exceed 20% of their gross monthly income.
Borrowers are not required to make payments during deferments and forbearances. Deferments and forbearances are available for up to 3 years each. The federal government pays the interest on subsidized federal loans during a deferment, but not on unsubsidized loans. The federal government does not pay the interest on either type of loan during a forbearance. If interest is not paid as it accrues, it will be added to the loan balance (capitalized) at the end of the deferment or forbearance period.
Borrowers who are still in school will be eligible for an in-school deferment for as long as they are enrolled on at least a half-time basis. After they graduate or drop below half-time enrollment, they will be eligible for a 6-month student loan grace period before repayment begins.
Income-Driven Repayment for Federal Student Loans
There is another option for financial relief, which is an income-driven repayment plan.
If the borrower’s income is less than 150% of the poverty line, their monthly loan payment will be zero under the income-based (IBR), pay-as-you-earn (PAYE) and revised pay-as-you-earn (REPAYE) repayment plans. If the borrower’s income is less than 100% of the poverty line, their monthly loan payment will be zero under the income-contingent (ICR) repayment plan.
If your income has changed, you can ask the loan servicer to recertify your income before the annual recertification date.
The federal government pays the accrued but unpaid interest on subsidized loans during the first three years under IBR, PAYE and REPAYE. The federal government pays half of the accrued but unpaid interest on subsidized loans during the remainder of the repayment term under REPAYE.
The federal government pays half of the accrued but unpaid interest on unsubsidized loans for the entire repayment term under REPAYE.
A new version of the REPAYE plan, called the SAVE plan, will soon become available where the loan payment will be zero if the borrower earns less than 225% of the poverty line. In addition, accrued but unpaid interest will be waived by the U.S. Department of Education if the calculated payment is less than the new interest that accrues.
Fresh Start Program
The Fresh Start program is a new program that provides some relief for borrowers who were in default on their federal student loans before the pandemic. Under the new program, a borrower’s eligibility for federal student aid (including Federal Pell Grants and Federal Work-Study) will be restored. In addition, borrowers have one year after the end of the student loan payment pause (i.e. sometime in 2024) to enroll in a repayment plan, including the income-driven repayment option. There are additional details on the program that can be found at U.S. Department of Educational – Federal Student Aid.
During the 12-month on-ramp, which ends on September 30, 2024, late and missing payments will not be reported to credit reporting agencies. Loans will not go into default or be turned over to collection agencies. Late fees and collection expenses will not be charged.
Like a forbearance, interest will continue to be charged and missing payments will not count toward forgiveness. Skipped payments will be due when the on-ramp ends, unlike the paused payments.
After the on-ramp is over, payments on Direct Loans will be considered late when they are more than 30 days after the due date and will be reported to credit reporting agencies when they are more than 90 days after the due date. Late fees of 6% of the amount due and unpaid will be charged. When a loan is in default, collection charges of up to 20% will again be deducted from payments before the rest is applied to interest and principal. Defaulted loans will once again be subject to administrative wage garnishment and offset of income tax refunds and Social Security benefit payments.
Options for Private Student Loans
Private student loans are not eligible for the payment pause and interest waiver. However, most lenders have programs available to assist you if you’re having difficulty making your payments. Contact your lender or loan servicer to explore your options if you are or will be struggling to repay your private student loans.