Preparing for Student Loan Repayments to Return

Yes, they will come back (eventually). Payments on federal student loans, on pause since the spring of 2020, will resume May 1st. Needless to say, you need a plan. If your financial circumstances have been largely unaffected by the pandemic or you have recovered from a financial lull, start subtracting an amount equal to your old monthly payment and “pay it” to your savings account. Use these final months to “re-train” your budget to accommodate this monthly payment. If you have absorbed your student loan payment into your regular spending, now is the time to wring it out. You must be able to identify now the specific change that you will make in your spending habits to accommodate your student loan payment when it resumes.If your finances have deteriorated with the pandemic, perhaps due to a loss of income and/or increased child care costs, you must be proactive in addressing this situation:

• If you were repaying your loan under the 10-year Standard Repayment program, now is the time to consider switching to an income-driven repayment plan.

• If you are already on an income-driven repayment program and your household income is less than what it was when you last made payments, go ahead and recertify your income immediately with your loan servicer. You don’t need to wait for them to ask you to do so. (You should also do this if your family size has increased, and no I am not referring to your pandemic puppy.) You may find that your recalculated payment is affordable, even within your new reality.
• Come May, if you are still facing economic hardship such that resuming any payment will not be possible, contact your loan servicer and discuss options for a payment forbearance. Interest will usually accrue (unlike the current CARES Act general forbearance), however this may be just the temporary breathing space that you need to avoid delinquency and default, which could have long lasting and potentially ruinous consequences.

But what if your finances have actually improved since you last made a payment, and you are sitting on “excess savings”? Until the end of the payment pause, the interest rate on your federal loan is set at zero. Any payment that you make during this time will go entirely to the principal portion of the loan. Assuming that you are not seeking eventual loan forgiveness (for example, under the Public Service Loan Forgiveness program), extra payments now could make a meaningful dent in your balance. Of course, this only makes sense after you have taken care of the essentials: funded an emergency fund, eliminated high interest debt, put your retirement savings on track.So, what’s your plan? If you don’t have one, contact a member of the Your Money Line team. We can help you meet the moment!