With Student Loan Payments Resuming, What Are Your Options?

For the first time in three and a half years, millions of people with federal student loans will once again have to make payments. Such payments were suspended without interest in March 2020 as part of a sweeping COVID-relief package. Interest will start accruing again on Sept. 1 and loan payments will resume in October. Easy to borrow, tough to repay

Student loan debt now totals nearly $1.76 trillion, 93% of which is held by the more than 43 million Americans who have federal (as opposed to private) student loans. Federal loans have been relatively easy to obtain, but many borrowers soon found them difficult to repay.

Before the payment moratorium began, more than 6.5 million federal student loan holders were either 90+ days late on their payments or in default, according to the Federal Reserve Bank of New York.

Under normal circumstances, borrowers who fail to make payments risk having their wages garnished or tax refunds withheld by Uncle Sam. However, the White House has announced plans to give struggling borrowers a 12-month “on-ramp” that will temporarily remove the threat of default or harm to one’s credit score if they fail to make on-time payments.

While President Biden had hoped to go even further by forgiving hundreds of billions of dollars in remaining balances, the Supreme Court struck that down. At press time, the president announced a new smaller loan forgiveness program, but it was unclear if and when that program might be approved.

If you have a student loan, two plans that could move forward are loan consolidation or refinancing. Loan consolidation Student-loan borrowers with multiple federal loans are eligible to consolidate them into one loan. There is no fee, nor do you have to go through underwriting to qualify. You might even be able to include a loan that’s in default as long as you have a new repayment agreement with your loan servicer. (Borrowers in default should explore the government’s Fresh Start program.) If you consolidate, your new fixed interest rate will be a weighted average of the loans being combined. To estimate what your new interest rate and monthly payment will be, gather information about your federal loans and then enter them in an online calculator.

The primary benefit of consolidation is the simplicity of having just one loan to track and pay. Your monthly payment may be lower too. That’s because consolidating will reset your payoff clock, with the option to extend what was originally a 10-year loan all the way out to 30 years.

While that will lower your monthly payment, it’ll also cost more in total interest by the time the new loan is paid off. However, there are no pre-payment penalties. So, a consolidation loan with a longer payoff timeline may give you the breathing room you need in your monthly budget right now, while giving you the flexibility to make accelerated payments when your financial condition improves.

If you decide to consolidate, you will continue to have access to several programs unique to the federal student-loan program. They include an income-based repayment plan (the Education Department has a new Save on a Valuable Education — SAVE — plan that promises to provide the lowest monthly payments of any income-driven repayment plan), public service or teacher loan forgiveness, and deferment or forbearance. Such plans may be beneficial should you lose your job, suffer an economic hardship, or decide to go back to school.

In fact, consolidation may even help you qualify for some of these plans since they are based on your loan balance, which would become higher when you consolidate several loans into one.

You can learn more about loan consolidation and apply at the U.S. Department of Education’s website. Loan refinancing

Another option may be to refinance your debt with a private (non-government) loan. You can turn government loans, private loans, or a combination of both, into a single private loan. There are three key factors to consider.

First, whereas many government loans are not based on your financial condition, private loans are. So, whether you qualify — and if so, at what rate — is determined in large part by your income, employment history, how much other debt you have, your credit score, and more. If you have especially high interest rates on your current loans and a strong credit score, you may be able to get a lower refinancing rate than the rate you’d get with a federal consolidation loan.

Second, the biggest downside to using a private lender is that if you turn a federal loan into a private loan, you’ll lose access to the government’s income-based repayment, loan forgiveness, and deferment or forbearance plans.

Third, with a private loan, you will be offered your choice of a fixed or variable interest rate. While the variable rate may look appealing, that may end up costing you more over the course of a long-term loan since the rate could rise. Also, refinancing your student debt with a private loan may require a loan “origination” fee, so be sure to ask about that and any other fees.

To further explore refinancing your student loans, contact two or three private lenders to learn about terms.

Whether you’re considering loan consolidation or refinancing, weigh your options carefully. Once you choose either one, there’s no going back. *Image used with permission. *