What if I don't repay my student loans? 7 burning questions as repayments resume

This month, millions of families will have to restructure their finances and investments to make room for monthly student loan repayments, which resumed Oct. 1 for close to 45 million Americans after they were paused for more than three years during the pandemic.

Some payments are so high they are similar to paying rent or a mortgage twice over, leaving borrowers scrambling for options.

Many borrowers had anticipated relief from the Biden administration's plan to forgive $400 billion of the roughly $1.77 trillion in student loan debt nationwide, but that plan was struck down by the Supreme Court in June. On Oct. 4, Biden announced $9 billion in student debt forgiveness for 125,000 borrowers that were already eligible for some form of cancellation, such as for disabilities or public service.

There are options available to borrowers, such as the new SAVE plan, which adjusts monthly payments based on income and family size. Still, borrowers have been left with questions as they stare down their student debt.

Philippa Satterwhite, coordinator of financial wellness and education for the Center for Financial Wellness at the University of Tennessee at Knoxville, answered seven questions from Knox News as student loan repayments resume. The center educates students on long-term financial habits and provides services like personalized budgeting tools.

This Q&A has been lightly edited for length and clarity.

What happens if I don’t repay my student loans?

The Department of Education has several mechanisms they can choose to apply if a borrower does not repay their loan:

• They can apply late fees and penalties.

• They can report missed payments and/or defaults to the national reporting agencies, which will impact your credit score, which would in turn impact your future ability to borrow for other large expenses, such as a car or a home. This can also impact your ability to rent, since more and more leasing companies are considering credit scores when reviewing rental applications.

• They can garnish your wages, keep your tax refund and other government payments, such as Social Security benefits, to use to pay towards your loan debt.

Defaulting on student loans can keep the borrower from accessing additional loans in the future. If someone is thinking of continuing their education, defaulting on a previous student loan will impact accessing additional federal and private loans.

How do I start to rebalance my budget to pay student loans back?

There is no one-size-fits-all strategy to personal budgeting, but we would recommend starting with reviewing your financial priorities and your financial goals.

As you prepare for student loan repayment, you will want to review your current budget and knowing your priorities and goals can make it easier to decide if you will need to increase your income, reduce your spending, or both. You may be able to reduce discretionary spending, such as your subscriptions and memberships, the times you dine out or other areas you may be overspending.

You may discover that you could bring in additional income by renting out space, taking on a part-time job, or selling items you create. By focusing on your priorities and goals as you review, your budget will assist you in determining what is realistic and possible in your individual financial situation.

How should I rethink my investment choices now that student loan repayments are required again?

Choosing between paying down debt or investing does not have to be mutually exclusive. Managing your finances is a continuous process that involves the ebb and flow of rebalancing and rethinking your priorities.

If you have taken on federal student loans in the last few years, then you may have had some of the lowest interest rates in recent years. If your student loan interest rate is below 4% and assuming an average rate of return on investments is 6%, then having an investment strategy will net you more income in the long term than the money you save on interest from paying off the student loan earlier.

If your interest rate on your student loan is over 5% and you plan to make some big purchases in the next few years, then taking an aggressive approach to reducing your student loan debt may be the better option.

Either way, we would caution away from reducing the money you are putting towards savings or an emergency fund to either pay towards debt or to put into investments. It is important to prioritize money on hand to cover your needs and emergency expenses. There is no right answer to managing your finances. You will want to consider your finances and research your options, then you will be better equipped to make the right decision for you.

What is the best student loan repayment plan available?

The best loan repayment plan is usually the one where you pay the least amount of interest, however it could be unrealistic if the monthly payment is too much for your budget. You may have to consider an income-driven repayment plan. We recommend doing the student loan simulator on studentaid.gov to get a better understanding of which repayment plan is best for you.

What are the biggest mistakes you see people make when it comes to student loans? How can I avoid those mistakes?

It is easy to get used to certain spending and saving habits during the student loan freeze or the 6-month grace period that federal student loans offer. Then your first payment is due, and you aren’t prepared for it.

That’s why we recommend preparing and following a budget that includes your student loan payment even if it isn’t due just yet. You can put that money towards an emergency fund. Also, if you are struggling to make your payment, don’t hesitate to reach out to your loan servicer to see if they have any plans of action.

I’ve heard that I shouldn’t refinance my federal student loans. What if I can’t meet my current monthly payment?

Whether you should refinance your federal student loans depends on your current financial situation. If you have stable income and can qualify for a fixed interest rate for the entire loan repayment period that is lower than your federal student loan’s interest rate, then it could be a good option for you.

If you can make the on-time payments on the loan, then this will save you time, money, or both. If you do refinance your federal student loans to a private lender, you do lose the repayment options available through the federal loan program, meaning if you are no longer able to afford your monthly payments after refinancing, then you will not be able to enter a different repayment plan.

If refinancing is not an option, then one of the benefits of having a federal student loan is the variety of loan repayment options they provide. If you cannot meet the monthly payment on your federal loan, then you can apply for one of the Department of Education’s income-driven repayment plans.

You would work with your loan servicer to determine eligibility for one of these plans. If approved, then it will lower your monthly payment, but it will take longer to pay off the loan and increase the amount of interest paid on the life of the loan.

If your situation changes and you can make a higher monthly payment, then you can move back to the standard plan to pay off the loan in less time than the income-driven repayment plan.

I need to take out student loans to pay for college or grad school. How should I think about the long-term impacts of student loans?

The long-term impact of student loans differs from person to person. The amount the student borrows and how much time they need to repay it will determine the long-term impact on the borrower. Either way, taking on student loans does have an impact on their consumer spending and will impact their ability to take on additional loans, such as a mortgage.

Obtaining a college degree is an investment that does produce a return both for the graduate and for the community where that college graduate lives. Students who borrow will want to consider the return against what salary they can expect from the job market and the cost of living of the area they plan to reside.

Students who are currently borrowing should think now about these long-term impacts. They need to begin building habits they can use now and in the future. They will need to consider what other expenses they need to cover while in school and if any of those expenses could be covered with something other than a student loan, such as income from a part-time job or leveraging their skill or hobbies into a side-hustle.

If they start to do this now, then they can plan for expenses after college, which will include repaying any student loans.

Daniel Dassow is a growth and development reporter focused on technology. Phone 423-637-0878. Email daniel.dassow@knoxnews.com.

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This article originally appeared on Knoxville News Sentinel: Student loan repayment answers from University Tennessee financial pro