Federal student loan borrowers are not required to pay their loans in full since March 2020. This pause could last until the summer 2023. According to the Consumer Financial Protection Bureau’s November report, they are still struggling, despite that relief.
The study of 34 million student loan borrowers found that 7.1% of borrowers with student loans were not in default. This is an increase of 6.2% from the beginning of the pandemic. Borrowers who have defaulted on student loans in the past are worse off. The percentage of those struggling to pay other bills increased from 9.8% up to 12.5% during that time.
Although the percentage increases might seem insignificant, they are significant for hundreds of thousands of borrowers.
This situation could get worse if student loan repayments resume next year. However, a one-time student debt cancellation of up $20,000 per borrower — currently on ice because the program’s legality has been challenged by multiple lawsuits — could prove to be a huge help, according to the CFPB.
What does the new data mean and what can borrowers do now to prepare?
Cancelling student debt could help alleviate credit problems
President Biden’s plan to cancel student debt — up to $10,000 for borrowers earning less than $125,000 and $20,000 for Pell grant recipients — could have a significant impact on those who anticipate that they will be in financial trouble when payments resume.
Nearly half of borrowers who are behind on student loans could see their student debt forgiven completely. Twenty-five per cent of borrowers who have a non-student loan delinquency are responsible for paying off less than $10,000 of student debt. Another 19% of these borrowers are in the $10,000-$20,000 range.
“Unless [Education] Department allows debt relief, we anticipate that there could be a historically large increase in federal student loan defaults and delinquency as a consequence of the COVID-19 panademic,” Education Department Undersecretary James Kvaal stated in a court filing.
The consequences can be severe. Any credit payment that is late or more than 30 calendar days overdue can damage your credit score up to 100 points. Borrowers can suffer even more damage if they default. The type of loan you have will determine when your bill becomes default. Federal student loans are the most common example. Borrowers default when their bill is more than 270 days late.
Low credit scores can make it harder to rent an apartment, get a mortgage, or obtain an auto loan.
A default is really, really serious… the later the payment is, the greater the damage to your credit score,” states Bev O’Shea (credit expert and former NerdWallet writer).
She advises borrowers concerned about missing a credit payment to contact their student loan servicers immediately to inquire about forgiveness and forbearance programs.
O’Shea states that it’s better to ask questions early than later, especially if you’re already having problems or are in trouble.
Can student debt be cancelled?
We will not know when loans will be cancelled until next year.
Biden’s comprehensive plan to cancel student debt has been put on hold by several lawsuits. Six states have filed a lawsuit against Biden claiming that debt relief would reduce tax revenue and affect the finances of state-based lending agencies. The Supreme Court will hear oral arguments in February.
Betsy Mayotte is president and founder of The Institute of Student Loan Advisors.
The White House announced that forgiveness is not possible and forbearance could be extended to June 30, 2023. If the litigation is settled or the administration allows the program to be implemented, it will end earlier. The final forbearance expiration date will be 60 days from the start of student loan payments.
“This extension will mean that struggling borrowers can keep food on the tables during the holiday season –and the coming months — while the Administration does everything possible to beat back the baseless attacks on working families with student loans,” Mike Pierce, executive director, of the Student Borrower Protection Center said in a statement after the news.
What can borrowers do now to prepare
Borrowers who are struggling to pay other bills and face uncertainty about repayment can still make it through the next few months. Take stock of your current situation.
Kristen Ahlenius is the director of education at Your Money Line, a corporate financial wellness platform. She says that your monthly payment may be different than it was at the start of the administrative forbearance. Your monthly payment might be different from what it was before the administrative forbearance. You might also have a different income and be able to consider income-driven repayment options .”
If you are concerned about your repayments, contact your loan servicer.
Ask your student loan provider about an income-driven repayment program. IDR plans allow you to cap your monthly student loan payments at 10% of your discretionary income, while also extending the loan’s life. The Education Department has proposed a new IDR plan that could lower the cap to 5% and classify more income as nondiscretionary. However, it is not yet available to borrowers.
Monthly payments can be as low at $0 depending on your income.
Ahlenius adds that income-driven repayment plans are more beneficial for households with larger families than those with lower incomes.
Recover student loans from your budget
Revisit your budget. Start putting aside money now to cover the first few months of student loan repayments if you are worried about how you will manage them after forbearance ends. This money should be saved in a separate savings account such as a high-yield savings accounts.
It is possible that you will need to make lifestyle changes to accommodate your student loan payments.
Other options for forgiveness
Biden’s student debt cancellation plan, now frozen, is not the only option for student debt forgiveness. Nearly a dozen forgiveness programs are already available by the government for specific groups of borrowers. These include teachers, nurses, and public servants.