Student loan payments are coming back: 5 things to know

Student loan payments return Sunday with hope, confusion and fear clouding the restart after a three-year pause.

The Biden administration is hoping to provide some relief to borrowers with a new income-driven repayment plan and an “on-ramp” repayment program, but the on-switch also comes as Congress is struggling to keep the government funded.

A shutdown could hurt student loan servicers already struggling to handle tens of millions accounts getting turned on at once after a break that began in the early days of the coronavirus pandemic.

Here is what borrowers need to know as student loan payments begin:

Borrowers have an ‘on-ramp’ repayment option

While student loans are restarting, the typical consequences for missing payments will not be enacted until October 2024. The Biden administration is offering an “on-ramp” repayment option for the upcoming year that allows borrowers to miss payments with few financial consequences.

Borrowers who miss payments will not be labeled as delinquent, will not have their wages garnished and will not be referred to debt collections.

However, interest will still accrue on the loans, and missing payments have the potential to impact a borrower’s credit score.

The Department of Education has said it won’t report a borrower to a credit company for missed payments, but that doesn’t mean credit companies won’t find out.

“There could be situations where potentially because you’re not making your payments, the value of your loan is increasing because it’s collecting interest, so you will owe more money. The credit bureau takes that into account and maybe your credit score gets dinged a little bit,” said Jacob Channel, senior economist and student loan repayment expert at Lending Tree.

The consequences for a credit score hit shouldn’t be as severe as normal because the department is not reporting people as delinquent, which typically has a huge impact on credit scores, but Channel says there are many unknown factors at play.

“At the end of the day, while they might not report you as delinquent, if they are still reporting things like your loan balance, there could still be some negative repercussions,” he said.

More than 28 million Americans have to start paying

The resumption of student loans is set to impact more than 28 million Americans as all their accounts get turned back on at once.

While 45 million have student loan accounts, only 28 million will start paying on their loans next month. Seven million borrowers will be in default and eligible for the Fresh Start student loan program, and 8 million more won’t owe payments because they are either in school, in another payment pause such as military deferment or waiting to get their loans discharged.

The average student loan borrower owes around $29,000, with all such debt in the country totaling more than $1.75 trillion.

Most of that debt is held by the federal government, which has kept payments paused for the past three years due to the economic upheaval of the pandemic.

President Biden made an attempt during the pause to cancel up to $20,000 in student debt for all borrowers, but it was struck down by the Supreme Court.

The Education Department is making another attempt through the Higher Education Act to deliver student debt relief, but it is unknown when details such as how much debt could be forgiven or who would qualify for it will get released.

“I’d say many borrowers have not prepared well, maybe from a vain hope and a campaign promise. They have often racked up their own debt separately from student debt,” said Adam Kissel, visiting fellow in the Heritage Foundation’s Center for Education Policy.

New income-driven repayment plan

The Biden administration has also released a new income-driven repayment (IDR) plan before the restart of payments called the Saving on a Valuable Education (SAVE) plan.

The new plan is the “most generous” ever offered to borrowers, according to Education Secretary Miguel Cardona.

The plan is getting implemented in two phases. Some of the changes coming this year include raising the income exemption from 150 percent to 225 percent above the federal poverty guidelines and stopping the growth of unpaid interest.

Other changes coming next summer include cutting monthly payments from 10 percent to 5 percent of discretionary income.

“The SAVE plan is a lifeline if you’re able to get on a $0 payment, and we have worked with some borrowers, especially older borrowers on Social Security” to get on that plan, said Natalia Abrams, president and founder of the Student Debt Crisis Center.

“But the folks that we’re seeing it harm or not be helpful for is our folks that may have seen an increase in their income during the pandemic. And then when they go to apply, the people who were on a previous IDR plan … they realize they have to pay a much higher payment,” Abrams said.

Student loan servicers may be slow

Student loan servicers have a difficult task ahead of them as millions of accounts turn back on at once — after they failed to receive a requested budget increase from Congress.

The Department of Education previously said the allotted funding would not be enough for a smooth transition.

“As the Department has repeatedly made clear, restarting repayment requires significant resources to avoid unnecessary harm to borrowers, such as cuts to servicing,” a spokesperson said.

Others have argued the department could have allocated money better to help loan servicers as they prepared to take on this task.

The cuts have hit the customer service sector of student loan servicers, threatening to cause long wait times for borrowers who may need help once payments resume.

Government is preparing to shut down

Student loans are turning back on at a very tumultuous time for Congress as lawmakers struggle to pass a budget before Sunday and are running headfirst into a government shutdown.

The White House was asked if it considered pushing back the start date for resuming payments in light of the looming government closure. And while press secretary Karine Jean-Pierre said student loans are a “top priority,” she did not indicate they would push back the date.

“So, you know, if this happens, if Republicans in Congress, you know, go down this road of shutting down the government, we anticipate that key activities at Federal Student Aid will continue for a couple of weeks,” Jean-Pierre said. “But, however, if it is a prolonged shutdown lasting more than a few weeks, could substantially disrupt the return to repayment effort and long-term servicing support for borrowers.”

“So, the Department of Education will do its best to support borrowers as they return to repayment, as we have been saying for the past several months. But an extreme Republican shutdown, if this occurs, could be disruptive,” she added.

—Updated Friday at 12:20 p.m.

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