Since March 13, 2020, federal student loans have been set to 0% interest rates and payments on the loans have stopped. This interest-free forbearance has brought welcome relief to many student loan borrowers who've seen their finances take a hit during the COVID-19 pandemic. We've been calling this the "student loan pause".
But the student loan pause is set to expire in mid-2023 based on the status of the various lawsuits (with this allegedly being the final extension, even though Biden said it would NOT be extended again).
After such a long break, it's safe to say that no one is excited about having to make room in their budgets again for student loan payments. But it's also important to have a plan. Here’s what you need to do to prepare for when the dreaded moment finally arrives.
When Do Student Loans Unpause?
The U.S. Department of Education announced an eighth extension to the payment pause and interest waiver on November 22, 2022.
The student loan moratorium will continue through 60 days after June 30, 2023 or 60 days after either the U.S. Department of Education can resume implementation of the student loan forgiveness program or the lawsuits seeking to block the program reach a conclusion, whichever comes first.
If you have auto-debit set up for your student loans, the Department of Education has removed all pre-existing auto-debit setups. As such, you will need to reset your information and accounts so that your payment is automatically debited. Check with your loan servicer for more.
What Happens When Student Loans Unpause?
Two big things will happen when student loans unpause. First, the interest rate on your loans will increase back to it's pre-Covid level. Right now, the interest rate is set at 0%. Starting in 2023, the rate will revert to the original loan rate.
Second, borrowers will be required to make monthly payments on their federal student loans. These payments have been paused since March 13, 2020.
Third, if you were in delinquency or default on your student loans loans pre-pandemic, you will get a "fresh start" and your loans will resume in current status. However, this does require action on your part.
Note: Many analysts have been worrying that some borrowers may end up in default when student loans unpause. If you have Federal loans, you need to check your loan status and payment due. Don't let it default!
How Will Student Loan Forgiveness Be Impacted?
The $0 payments made during the coronavirus forbearance period count towards Public Service Loan Forgiveness (PSLF) and Income Driven Repayment (IDR) forgiveness.
If you made payments during the forbearance, request a refund immediately. You are legally entitled to a full refund of all payments made from March 13, 2020 through the end of the pause in mid-2023.
Don’t delay on requesting a refund. This is something to take care of as soon as possible.
$10,000 or $20,000 in Loan Forgiveness
Some borrowers may qualify for the recently announced $10,000 or $20,000 in loan forgiveness. For some borrowers (with income on file with the Department of Education), this will be automatic. For others, you will have to apply for this loan forgiveness.
When details emerge on the application process, we will post them here. See our full post on Biden's Blanket Student Loan Forgiveness Plan.
Tips To Prepare For When Student Loan Payments Resume
The thought of having to fit a hefty student loan payment into a budget that's likely already strained can feel scary. But don't stress. Below, we cover 5 tips to help make the transition a smooth one.
Prepare Your Budget
With eight to nine months of no payments, your checking account may be shocked when loan repayment resumes. Unless you’ve gone onto an Income-Driven Repayment (IDR) plan, your new payment will be the same as your payment from February 2020.
Between now and the end of the year, visit your loan servicer’s website to check your payment. Then build the new payment back into your budget.
Update Your Contact Info With Your Loan Servicer
Anyone who has moved or changed phone numbers or email addresses should update their information with their loan servicer. Your loan servicer will help you handle any repayment hiccups that may come your way.
An easy solution to this is to make sure you have setup your online account so you can view your loan status, information, and even make payments.
If you're worried about your loan servicer changing (because maybe you had Fedloan or GSMR), that's not set to take place until a later date. So, if these are your current servicers, you should be contacting them.
Related: The Complete List Of Federal Loan Servicers (With Contact Info)
Read Mail From Your Loan Servicer
Loan servicers may send you important information about where your loan stands and things to keep in mind when student loans unpause. Be careful not to accidentally toss any communication from your servicer. Read the letters and take action as needed.
Again, if you have your loan portal setup online, you can also opt for e-Statements and can view everything online.
Re-Start Direct Debit
In order to make sure all information was accurate, all previous auto-debit setups were removed. All borrowers will need to login to their loan servicer's website and re-setup their direct debit settings.
This will be annoying for some borrowers, but given how much has changed in the last 20 months, it makes sense to ensure that student loan payments are being pulled from the correct account.
Turn Off AutoPay If Needed
If you’ve used set up automatic transfers to your 401(k) or other accounts to capture savings from the paused payments, be sure to turn those off in January. You don’t want to accidentally overdraft once payments resume.
Consider Enrolling In An Income-Driven Repayment (IDR) Plan
People who lost income during the first nine months of the pandemic may find that the old payment doesn’t fit in the new budget. In that case, you may want to enroll in an Income-Driven Repayment (IDR) plan before the year’s end.
Enrolling in an IDR plan will not prematurely restart your loan payments. But it’s important to enroll before your first payment comes out. To enroll in your IDR plan of choice, visit StudentAid.gov/idr. Click on “Apply Now,” to start the application.
Re-Certify Existing IDR Plans
If you were previously on an income-driven repayment plan, you need to certify your income in order to make sure that your payment is accurate. For the repayment re-start only, the Department of Education is allowing you to "self-certify" your income in order to make sure your IDR payment is correct.
You can self-certify your income by going to StudentAid.gov.
How To Begin Making Payments
Starting in 2023, you’ll need to start making student loan payments again. Anyone enrolled in auto-debit programs will see the payment auto-drafted from their bank account. Loan servicers will NOT automatically restart auto-debits, so you need to make sure you login and update your information correctly.
Borrowers who made manual payments must start sending checks or making transfers through the loan servicers website. If you need more information about making manual payments, contact your loan servicer.
Recertifying Income When Student Loans Unpause
If you’re on an IDR plan, you’ll eventually need to re-certify your income. Income re-certification dates have been pushed to some time in 2023. Your loan servicer(s) should send you information about your re-certification date.
You can also self-certify your income for this year only. You can do that by going to StudentAid.gov.
Should I Pay Off My Loans In A Lump Sum?
While many people have struggled over the last several months, some have managed to increase their savings and income. If you have enough money to pay off your loans, you may want to get rid of them now. You can schedule a payment to pay off the loans in full to start 2023 on the right foot.
If you don’t have enough money to pay off your loans in a lump sum, it may be advisable to wait on extra payments. The economy is still shaky and it could be risky to deplete savings to get rid of debt that has a manageable interest rate. Consider waiting until you can pay off the debt in full before tacking on big extra payments.
Final Thoughts
As long as your contact and banking information is up to date with your servicer and you've made necessary changes to your automatic transfers, the unfreezing of student loan payments shouldn't cause you too much grief.
If you’ve lost income or struggled over the last several months, IDR plans can keep your payments manageable. Or if your financial situation is strong, you may want to shop around with student loan refinancing lenders to see if one could offer you a lower interest rate.
There was virtually no benefit to refinancing federal loans during the 0% forbearance period. But with payments resuming, it could once again be a strategy worth considering.
Regardless of your personal situation, it's important to make your plan today so that you're prepared for student loan repayment tomorrow.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.
Editor: Clint Proctor