How to Prepare For the Return of Federal Student Loan Payments

American's didn't get many breaks in 2020, one was student loans. Well in the near future there will be a return of student loans. Ready? The past year has been extremely difficult for many Americans due to the global pandemic. Lost wages due to the coronavirus, may have affected your ability to manage and repay student loans. One of the first policies implemented by the government was a hold-off on federal student loan payments to help struggling borrowers. Did you know things might change here soon, and there may be a return of student loan payments? 

Lost wages due to the coronavirus and the disease it causes, COVID-19, may affect your ability to manage and repay student loans. The interest-free federal student loan payment pause, known as forbearance, was extended three times after it initially went into effect in March 2020, but this extension is scheduled to expire on Oct. 1, 2021. I hate to be the bearer of bad news, but If you have federal student loans, take steps now to prepare a return of student loan payments in the not-so-distant future.

We can’t help but mention how the pause helped almost nearly 42 million Americans who owe federal student loans. Credit scores among borrowers have increased and the Department of Education estimates that the policy collectively saved borrowers roughly $4.8 billion per month’s worth of accrued interest.

What Happened to Federal Student Loans During the Temporary Forbearance? 

The CARES Act and subsequent extensions have provided several relief measures to help federal student loan borrowers cope during the coronavirus pandemic. The emergency relief flexibilities include but aren’t limited to the following relief measures for ED-owned federal student loans:

  • Automatic suspension to most federal loan borrowers.
  • Automatically waiving interest rate on federally held student loans.
  • Stopping all collection activities on most federal student loans in default

It is important to start taking steps now to prepare yourself for when your monthly student loan payments resume. Below are four steps you may want to consider.

Know How Much you Owe

I know for many your student loan debt has been “ out of sight, out of mind” in the past year. So now is a good idea, to take stock to better understand how much you owe and who your loan servicers are. I would recommend you request a copy of your credit report from each of the three major bureaus Experian, Equifax, and TransUnion via annualcreditreport.com. All your outstanding debts, including student loans, should be detailed in your reports. Next, make note of your current balances, interest rates, and monthly payments. You can then use a student loan payment calculator to figure out how much you’ll be required to pay each month and how much interest you’ll pay overall.

Start Making Payments Now

Just because federal student loan payments are on pause doesn’t mean you have to stop making them. The coronavirus continues to affect so many people, but you are able to afford to make your payments start doing so before the forbearance is up. This would allow you to get back into a routine of making payments on a monthly basis.  It could also be a great way to repay your debt faster and save money. Monthly manual payments now can also reduce how much interest you accrue later on when the 0% student loan is removed. If you’re wondering how much these interest-free payments might save you, both in repayment time and money, a student loan calculator can help you crunch the numbers.

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Build Your Emergency Fund

There are still a couple of months left before payment resume. Now is the best time to consider making student loan payments to yourself. While your student loan servicer payments are on hold. Even if you can’t afford to pay your full student loan payment, you might be able to make a partial payment and tuck those funds into an emergency funds account.

Once normal payments resume, you can consider making a lump-sum payment to your servicer before the interest-free period expires on your loan, or you might keep the cash you saved in an emergency fund or use it to provide some extra cushion in case you have trouble keeping up with your monthly payments down the road.

RELATED: Emergency Fund 101: Everything You Need to Know

Apply for Other Types of Help

There are multiple federal student loan repayment options to eligible student loan borrowers under normal circumstances. Some of the best options include standard repayment or income-driven repayment, depending on your goals. Income-driven plans set monthly payments between 10% and 20% of your discretionary income. Payments can be as small as $0 if you’re unemployed or underemployed and can change annually. Income-driven plans extend your loan term to 20 or 25 years. At the end of that term, any remaining loan balance will be forgiven. You do pay taxes on the forgiven amount.

You can also lower payments with the graduated and extended student loan repayment plans, which don’t rely on your income. These offer fewer benefits than income-driven repayment, but they may make sense if you make a lot of money or want predictable payment amounts.

Summary

Finally, you may want to see if refinancing your federal student loan would benefit you financially. Student loan refinancing might help you save money over the length of your repayment or lower your monthly payment size. If you have federal student loans, you probably should not refinance while the government forbearance is in effect. If you decide to proceed, you should have stable personal finances and emergency savings before taking that risk.

A student loan refinancing may help you accomplish one or more of these goals:

  • Less interest payment over the life of the loan
  • Faster debt pay off 
  • Reduce monthly student loan payments
  • Release a co-signer

Use a student loan refinance calculator to estimate your savings.

It is important to think carefully about whether refinancing is a good fit for you. Should you decide to refinance, you’ll lose federal benefits like access to income-driven repayment plans and eligibility for loan forgiveness. It’s looking like there will be a return of student loan payments in the near future. We hope these tips will help you get ready.