Starting in May, the Department of Education will resume collecting federal student loan payments after more than two years of COVID-19 emergency forbearance.
Despite the Biden administration’s efforts to prepare the 42.3 million student borrowers, officials said it would be a “significant challenge” for borrowers to avoid defaults when forbearance ends, according to a new report from the Government Accountability Office (GAO).
“Education officials said the department has been communicating regularly with borrowers since suspending loan repayments in March 2020, but they expect it will still be difficult to motivate borrowers to resume loan repayments. their loans after more than two years of no payment activity,” the GAO said. reports.
Nearly 60% of Americans want the suspension of student loan payments extended through 2023, according to recent polling data. However, the Ministry of Education has not indicated that it plans to extend the abstention period again.
Keep reading to learn more about the end of federal student loan forbearance, including how you can prepare for when payments resume in May. One option is to reduce your monthly student loan payments by refinancing a private loan at a lower interest rate. You can compare student loan refinance rates on Credible for free without affecting your credit score.
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Some student borrowers at higher risk of delinquency
While the Department of Education expects it will be difficult to get many borrowers to resume student loan repayments, officials said some of them are at higher risk of default. payment on their loans.
This includes student borrowers who have not completed their studies and those who were in default before the suspension of payments began. Additionally, borrowers who started repaying their loans within the last 3 years are considered at risk because they have not been required to repay their student loans for most of their repayment time.
The Biden administration is providing targeted outreach to these borrowers in an effort to reduce their risk of default. For example, the department asks loan servicers to “conduct phone outreach to these at-risk borrowers to inform them of their payment due date and the various programs and flexibilities available to help them resume repayment.” “, said the GAO.
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What happens when you are delinquent on your student loans?
For student borrowers who cannot resume payments in May, delinquency has tangible consequences. If you are 90 days or more past due, your loan manager will report missed payments to the three major credit bureaus. This will result in a derogatory mark on your credit report which can negatively impact your credit score for years to come.
Borrowers who are in default for an extended period may not repay their loans, with the entire outstanding loan balance plus interest becoming due immediately. Failure to pay carries more serious consequences, as the loan officer can sue you for the debt. From there, the courts can garnish your wages or withhold your tax refund and other federal benefits to pay off the loan amount.
If you’re at risk of default, the Department of Education recommends changing your repayment plan, requesting a deferral, or consolidating through the direct loan repayment program. You can also consider refinancing a private loan at a lower interest rate to lower your monthly payments. However, this will make you ineligible for income-contingent repayment (IDR) plans, federal forbearance, and some student loan forgiveness programs. Visit Credible to learn more about refinancing student loans through a private lender.
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How to Prepare for the End of Student Loan Forbearance
About 50% of all federal student loan borrowers have been identified as being at risk of becoming delinquent when payments resume in May, according to data GAO acquired from Student Loan Services in October 2021. If you’re worried about repaying your student loan debt, here are some ways to prepare for the end of forbearance:
- Update your contact details at the federal student aid website. Between August and November 2021, the Department of Education sent a series of informational emails to approximately 35 million borrowers, the GAO said. Valid email addresses are still missing for around 25% of defaulting borrowers.
- Sign up for automatic payments again. Borrowers who were making loan payments by direct debit prior to the forbearance period will need to confirm that they wish to re-enroll for automatic payments. Without this confirmation, borrowers who were previously signed up for autopay risk missing their first payment.
- Sign up for an income-based reimbursement (IDR) plan. It may be possible to limit your federal student loan repayments to 10-20% of your disposable income by enrolling in an IDR plan. To meet the eligibility criteria, you will need to certify your current annual income and family size through your loan servicer.
- Request additional temporary relief. The Department of Education offers several ways for borrowers facing financial hardship to temporarily suspend payments, including economic hardship and unemployment deferment. These periods of non-payment can last up to 36 months and interest may accrue on your loans during this period.
- Reduce your monthly student loan payments with refinancing. If you’ve exhausted your other options for reducing or deferring your federal student loan payments, it may be possible to reduce your monthly payments by refinancing a private student loan at a lower interest rate.
A recent analysis by Credible found that well-qualified borrowers could lower their monthly payments by more than $250 on average by refinancing with a longer-term loan. Use Credible’s student loan refinance calculator to estimate your potential savings to determine if this strategy is right for your financial situation.
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