Here's how to prepare, financially (and emotionally).
Many of us felt a financial squeeze during the pandemic. If you’re among the more than 40 million people paying off federal student loans, the Coronavirus Aid, Relief, and Economic Security (CARES) Act might’ve allowed you at least some breathing room by pausing your payments from March 27 to September 30, 2020. That end date has been pushed back a few times since then. But this August, the Department of Education announced a “final extension” of this pause until January 31, 2022.
In short, unless you opted out of suspending your payments, you’ll need to start making them again — nearly two years later. A lot might’ve changed during that not-insignificant amount of time. Maybe you’ve experienced a dip in income, or used the funds that would’ve normally gone toward your student loans to cover other costs. Whatever your situation, you’ll need plan for this upcoming financial obligation. We spoke with experts about what you can do in the next few months to prepare for it.
Make sure your information is up-to-date
Checking the accuracy of the contact info that your loan servicer has on file will ensure that you’ll see the emails and other alerts notifying you that payments are coming due, says Nika Booth, a money coach and personal finance content creator who chronicles her journey to debt freedom on Instagram. The Federal Student Aid (FSA) explains how to identify your servicer on its website. Keep in mind that your servicer might’ve changed amid recent upheavals in servicing contracts with the Department of Education.
You want to make sure your bank account information is up-to-date, too, especially if you’re no longer funding the account you used to make student loan payments pre-panny. “The last thing we want is student loan payments to resume, automatic payment information to be completely wrong, and then we’re hit with insufficient funds or overdraft fees, and then that creates another economic hardship,” Booth says.
Understand your repayment plan
“You want to make sure you know your agreement and understand what your payment is going to be,” especially if you recently graduated and haven’t started making payments yet, says Rita-Soledad Fernández Paulino, a financial educator and coach who aims to teach BIPOC, women, and LGBTQ people how to build wealth.
In the standard repayment plan, you pay the same amount each month so that you pay your loan in full after 10 years. “However, that may be something that is currently out of your budget, and I think that’s something that people need to look at,” Paulino says. If you’re struggling to understand your plan, she says you can DM her on IG.
Create a repayment strategy, if you haven’t already
“The best way to tackle any debt or any obstacle is to face it head-on,” Booth says. “Look at your loan details.” Your loan details, which you can get from your servicer, provide a breakdown of all of your loans, she explains, including the date they were disbursed. Determine what your outstanding interest is, and how much of your minimum payment goes toward it. Remember that you need to satisfy any outstanding interest before your payments are applied to your principal. Even if you pay, say, an extra $50 on top of your monthly payment, it could just be going to outstanding interest, not the principal.
If it sounds messed up, that’s because it is. “That outstanding interest is why it’s difficult for people to pay student loans,” Booth says. She suggests knocking out the outstanding interest on one of your loans while making minimum payments on the others. This way, “you’ll see actual progress in paying it off as opposed to dividing that extra money across multiple debts at the same time.”
Paulina recommends setting a debt payoff date. “Plan backwards,” she says. “Say I want to be debt-free in this many years. What is it going to take to do that?” You can use FSA’s loan simulator to help figure out the best repayment strategy for your goals and needs, Booth says. Logging in to your FSA account links the simulator to your federal student loan information.
Assess your budget
It’s been almost two years since your last student loan payment, and you might’ve gotten used to using that money for other things. In other words: “Lifestyle creep is real,” Booth says. To determine whether you need to update your budget, she suggests comparing your bank and credit card statements from before and after you paused your student loan payments. Note what you’re spending more on now than you were back then, and adjust accordingly.
At the same time, don’t deprive yourself, Paulino says. Depending on where you live in the U.S., you might understandably be itching to hit up the restaurants and bars that’ve finally reopened. “You’re going to set yourself up for failure if you think, ‘Oh, I shouldn’t do that,’” she says. “Whatever you’re choosing to do, be intentional about it.” If going out to restaurants will make your wealth-building journey sustainable, make sure to budget for it. “Anything that feels like deprivation isn’t sustainable.”
Start making payments now, if you can
If you paused your student loan payments and have the means to resume making them, you might as well start in order to take advantage of the temporary 0% interest rate, Booth says. Normally, interest on student loans accrues every day, adding to your balance. But since no interest accrued during the pandemic pause, people who continued making payments had an easier time repaying their outstanding interest, which didn’t increase. Sure, you might not have the year or two that some people did to pay off this fixed outstanding interest, but a few months’ worth is better than nothing.
Call your loan servicer ASAP if you won’t be able to afford your payments
“Be proactive,” Booth says. As stressed out as you might feel, know that you do have options. If you’re not earning enough to pay your monthly minimum, you can apply for an income-driven repayment plan, she points out. You can also request an economic hardship deferment, general forbearance, or unemployment deferment if you’ve lost your job. Your servicer will work with you to figure out the ideal repayment plan for your situation. Booth adds that FSA also has a repayment simulator that suggests various relief options.
Look into Public Service Loan Forgiveness (PSLF)
PSLF is a program that forgives the remaining balance on your Federal Direct Loans after you’ve made 120 qualifying payments — that is, monthly payments over 10 years — and meet a few other requirements while working a full-time public service job, Booth explains in her free PSLF quick reference guide. The program’s gotten a bad rep, though, partly because of its dismal 98% denial rate.
Thankfully, the Department of Education is planning an overhaul of PSLF. In the meantime — from now until October 31, 2022 — it’ll offer temporary retroactive credit for payments, even if they didn’t previously meet the requirements, as part of the Temporary Expanded PSLF. As a result, an estimated 550,000 borrowers could have their loans either completely forgiven or closer to the 120 loan payments needed to qualify for forgiveness, Booth says.
Her PSLF guide includes more detailed information, plus links to a bunch of resources, including FSA’s PSLF Help Tool, which can help you determine whether your employer qualifies, figure out what steps to take, and generate the required paperwork.
Look into refinancing private student loans
If you have both federal and private loans, Booth suggests evaluating whether refinancing your private loans could help free up cash that could go toward your federal loan payments. Refinancing your private student loans basically means switching them out with a private lender for a new one, per CNBC. This could lower your monthly interest payments, the outlet explained, and allows you to pick a repayment plan that fits your needs, including the option to pay a smaller monthly over a longer timeframe. You can do this through companies like Juno, SoFi, and Earnest, Booth says.
She cautions against refinancing federal loans, which could disqualify you from any other concessions that might roll out for them. Additional relief is certainly possible: After all, we’re still in a pandemic, and President Biden has voiced support for federal loan forgiveness.
In a perfect world, we would cancel student loans altogether. Marginalized people who don’t have access to generational wealth to cover the cost of higher education often have no choice but to take out student loans, Paulino explains. Indeed, Black college grads — whose families were legally denied the right to create generational wealth — owe $25,000 more in student debt than their white counterparts, on average, according to EducationData.org. “That impacts people’s ability to build wealth,” Paulino says. “It’s different starting your career with a negative net worth versus a positive net worth.”
Meanwhile, people are often shamed for their student debt, she adds, when it’s really the product of a broken system. Besides following her and Booth’s advice to resume your payments, she also recommends contacting your senator to advocate for student loan forgiveness. It’s a matter of not only personal finance, but social justice, too.