Here’s how borrowers can prepare for payments after a 3+ year forbearance period.

UPDATE: Impending government shutdown could add further complications for borrowers.

For Immediate Release:

September 28, 2023

Contact

Rob Mayo
rmayo@woodstockinst.org 

CHICAGO – On October 1st, federal student loan payments restart after over 3 years of forbearance. This new monthly expense will add considerable financial strain for struggling Illinois borrowers already navigating an inflationary, high-interest economic environment. Because missing monthly payments opens up borrowers to the risk of delinquency, default, and the resulting decrease to their credit scores, it’s crucial that borrowers understand the options available to them to make their monthly payments more manageable. 

Furthermore, advocates are now worried about how a very likely government shutdown could make the return to payments more confusing and chaotic for borrowers. A shutdown does not mean borrowers will be relieved of payments. However, a prolonged shutdown could mean both the Office of Federal Student Aid and its contracted student loan servicers will have significantly reduced capacity to assist borrowers navigating their payment options during a high-volume, stressful time. This comes as budget cuts to the Department of Education have already resulted in loan servicers laying off staff and cutting call center hours.

The average Illinois student borrower has $37k in student debt, the seventh-highest in the nation. 1.5 million Illinois student borrowers were estimated to be eligible for the Biden Administration’s one-time student debt relief program, and, of these borrowers, 1.044 million applied or were deemed automatically eligible for relief in one of the nation’s highest response rates. The Department of Education was able to approve 679k Illinois applicants before the program was blocked by lawsuits seeking to deny relief.

The resumption in student loan payment will impact Black graduates the most because they owe, on average, $25k more than their white counterparts and are more likely to have taken out loans.

“Canceling up to $20k for student borrowers making under $125K would’ve been an important first step to begin closing the racial wealth gap,” said Woodstock Institute President and CEO, Horacio Méndez. “Advocates have been pushed into a corner by the Supreme Court’s decision, and, unfortunately, the best thing we can do right now is help low-income Black and Brown borrowers be as financially prepared as possible to resume making student loan payments.” 

“The forbearance period helped our family have more money to support me during my pregnancy and the first year or so of our son’s life including prenatal care, baby food and supplies, groceries, as well as home repair and furnishings,” said student loan borrower Cairá Conner-Ware. “Without the relief, we will have a lower quality of life and increased stress having to manage our funds. This is especially important given we are back commuting to work, our son is in daycare, and our living costs have increased with the return to work and inflation.”

How Borrowers Can Prepare 

A number of options exist to make monthly payments for cash-strapped borrowers more bearable.

The first piece of good news for struggling borrowers is that missed payments will not negatively impact credit scores for the 12-month period following October 1st. During this “on-ramp” period, student loans will not fall into delinquency or default, and missed payments will not be reported to credit bureaus. Interest will still accumulate during this period and missed payments will be due at the end of the on-ramp period.

To prepare for payments, borrowers first need to update their contact info in their Federal Student Aid account and their loan servicer account. Borrowers who don’t know who their loan servicer is can find that information in their Federal Student Aid account. They should review the status of their loans and whether they are already enrolled in a payment plan. 

Recent reforms to payment plans are designed to soften the financial blow of monthly payments. This includes an overhaul of income-driven repayment (IDR) payment plans, where monthly payments are pegged to a borrower’s income. StudentAid.gov’s Loan Simulator is a great starting point for determining the best repayment options for individual borrowers.

Student loan holders will not be enrolled in repayment plans automatically. Applications to enroll in IDR plans on the Federal Student Aid site are open now. It’s crucial that borrowers thoroughly review all repayment options as there are a variety of payment plans and even potential forgiveness programs available. 

One new repayment plan that borrowers should consider is the Saving on a Valuable Education (SAVE) repayment plan, which replaces the REPAYE Plan and ensures that:

  • Any borrower making under 225% of the federal poverty line ($32,800 for a single borrower) will see their monthly payment reduced to $0. 
  • Starting in July 2024, borrowers on this plan will see their monthly payments on undergraduate loans cut in half from 10% to 5% of their discretionary income. 
  • As long as monthly payments are made, your overall loan balance will not grow due to accumulating interest.

All IDR plans provide that after 20 or 25 years of repayment, any additional debt will be forgiven. 

Additionally, borrowers in default should review the Fresh Start program, which provides benefits to help get out of default. Borrowers must sign up before August 31, 2024 to access this initiative.

Illinois student debtors looking for additional ways to prepare for this impending financial hit can visit WeProsperIL.org. The WeProsper Resource Guide has more details on student loan repayment options and information on various ways for impacted borrowers to meet their financial needs by either lowering their bills, getting access to additional income, and/or accessing low-cost, safe forms of cash.