If you have federal student loans, you probably breathed a sigh of relief when the CARES Act went into effect. The law put all federal student loans into “administrative forbearance”—lawyer-speak for an across-the-board temporary halt due to the coronavirus pandemic.
Since mid-March, you haven’t had to make any payments on these loans. Even better, they haven’t accrued interest, so you haven’t been penalized for taking a break like you normally would be. If you’re going for public service loan forgiveness, there’s good news for you too: Even though you haven’t made payments during these months, they still count towards earning forgiveness.
That all ends soon, though. On December 31, unless the forbearance is extended (lawmakers have proposed this in The Heroes Act). If it’s not, loans will start accruing interest and need payment on January 1. If you’re worried, we’ll help you sort out your options.
- Review notices from your loan servicer and reach out if you have concerns.
- Review your finances, and budget for monthly payments.
- Explore relief options like income-driven repayment plans and refinancing.
- Watch your credit report.
- Hope for an extension of student loan forbearance, but don’t bet on it.
Check With Your Loan Servicer
Most loan servicers have already sent notices updating you about the changes to come. It’s still a good idea to log into your account and make sure you haven’t missed any additional notices.
If you’ve set up autopay, it’s worth noting when your next payment will be withdrawn. If not, set yourself a reminder to manually make the payment before it’s due. If you have any questions or concerns, don’t hesitate to contact your loan servicer—the sooner, the better.
Review Your Finances
“I would say just take inventory of your financial situation, understand how your payment will kick back in,” said Lauryn Williams, a Certified Financial Planner and College Funding and Student Loan Advisor with Student Loan Planner.
If you’ve been on an income-driven repayment plan, this is especially important. You need to recertify your income every year with these plans. If that recertification took place while you weren’t making payments, be aware that your monthly payment may have changed.
Budget for Payments
If finances have been tight, it might be time to rework your budget. If you didn’t have one in the first place, now is a great time to start one.
“The clearest way to get ready is to have a budget, a clear budget, and [an] understanding that you have the amount that’s going to be necessary on a monthly basis,” said Williams.
Explore Other Relief Options
If you’ve checked your budget and see that it’s going to be hard (or impossible) to make your monthly payments, don’t fret. You have options.
Income-Driven Repayment Plans
Income-driven repayment plans recalculate your monthly payment based on your income. Here’s a brief summary of the major differences between the programs. But as always, the devil is in the details: Each program differs in how it treats things like your spouse’s income, how interest accrues on subsidized vs. unsubsidized loans, and eligibility requirements.
|Payment Plan||Payment Amount||Loan Forgiveness|
|Income-Contingent Repayment (ICR)||20% of your discretionary income or what you would have owed under a 12-year repayment plan (whichever amount is smaller)||25 years|
|Income-Based Repayment (IBR)||10% or 15% of your discretionary income, depending on when you first took out loans||20 or 25 years, depending on when you first took out loans|
|Pay As You Earn (PAYE)||10% of your discretionary income||20 years|
|Revised Pay As You Earn (REPAYE)||10% of your discretionary income||20 years if all loans are undergraduate loans; 25 years if some or all loans are from graduate school|
Refinancing Your Loans
Refinancing has two main advantages: You may qualify for a lower rate (especially if you have a good credit score), and you can stretch your loan out longer to reduce the monthly payment. But this increases the amount of interest you pay over the long term.
Plus, refinancing will cost you important student loan protections, such as the relief options you’ve enjoyed on your federal student loans. But if you’re relatively close to paying them off or would see a substantial reduction in interest rate, it’s worth considering.
Watch Your Credit Report
Once you resume payments, check your credit report to make sure your lender is reporting them to the bureaus.
It can take a few weeks for payments to be recorded, so add this to your to-do list for February and each month thereafter.
What to Do if Student Loan Relief Is Extended
The big question on everyone’s mind right now is whether student loan relief will be extended. “I think it's highly likely,” said Williams. “We're not out of the woods as a country.”
Even though it’s possible, it hasn’t happened yet. That’s why it’s still a good idea to plan.
“A lot of people are holding out for someone to swoop in with a cape and just make their loans magically go away with some big eraser,” said Williams. “I wouldn't bet on someone swooping in for forgiveness. I would have a clear plan for what is best, in light of the way that the current situation is set up.”
In other words: Plan for the worst, and hope for the best. Keep your fingers crossed for student-loan forgiveness proposals by the incoming Biden administration, but don’t budget for mere possibilities. If the best does come to pass, you can have one heck of a celebration. But if it doesn’t, then at least you’ll be secure financially.