(WASHINGTON) — It’s a moment those with student loans have been dreading — payments are one step closer to resuming.
After a three-year pause on federal student loan payments, Friday will mark the first significant step toward restarting the process: borrowers will once again see interest accrue on their loan balances.
The milestone comes one month ahead of the next major date for millions of American borrowers, Oct. 1, when payments will be due.
The two-step approach to restarting the student loan system is meant to give borrowers — and servicers — a slower on-ramp to dust off the cobwebs on a process that’s long been stalled because of the pandemic.
But the circumstances for restarting payments are far from what the Biden administration intended.
President Joe Biden’s debt cancellation policy was overturned by the U.S. Supreme Court earlier this summer.
The administration has still attempted to create a softer landing by giving a yearlong grace period to borrowers, during which no one will default on their loans if they miss a payment, and rolling out a new payment plan that could lower monthly payments for people, depending on their incomes.
“We recognize that the return to repayment mandated by Congress may cause significant financial challenges for many borrowers, many of whose lives may have changed since the last time they made a student loan payment, or this may be the very first time making a payment,” a spokesperson from the Department of Education told ABC News.
“We are committed to making that process as smooth as possible by providing support and resources based on borrowers’ unique financial situation so each borrower can make the repayment decision that is right for them,” the spokesperson added.
Here’s what to look for starting Friday:
What does it mean that interest will start accruing again?
A federal policy that has kept interest rates on student loans frozen at 0% for more than three years is officially ending Friday.
As of Sept. 1, the Department of Education says that borrowers will once again be charged the interest rate they were paying before March 2020.
Interest rates on student loans range from an average of between 4.99% to 7.54%, according to the Education Data Initiative, an organization that gathers educational data and statistics. Interest rates often have a big impact on how much a borrower ultimately pays back.
For example, an average interest rate of 5.8% means the average American, with a student loan balance of $37,338, would spend about $24,833 in interest over the total life of his or her loan, according to Bankrate, a company focused on consumer financial services.
Ahead of Sept. 1 and the impending payment dates in October, borrowers can check their balances and interest rates through their servicers, and if they don’t know their servicer, they can check that through the Office of Federal Student Aid (FSA).
When do borrowers have to start paying back their loans?
Broadly, the pause on payments ends in October — but the exact date that many borrowers will have to start paying off their loans again varies based on their loan servicers.
Borrowers should get a bill with a payment amount and due date at least 21 days before their due date, according to FSA. If they haven’t, the office recommends updating the contact information they have filed with both their servicer and FSA.
But borrowers should also be assured that the restart to payments will be a soft launch. The Biden administration has instituted a yearlong grace period as the ball gets rolling again, where late or missed payments will not be reported to credit agencies.
It’s not a pause, borrowers should be aware, as interest will continue to add up and payments will still be due, but it also spares the “worst consequences,” FSA says on its website.
“We will not report you as delinquent during the on-ramp, but we do not control how credit scoring companies factor in missed or delayed payments,” FSA says.
What else is the administration doing?
The administration is still fighting for debt cancellation on a broad scale, attempting a different path through the Higher Education Act of 1965 — which provides government-backed student loans and grants the U.S. Education Department the ability to “compromise, waive or release loans” – after the Supreme Court overturned the first policy. Yet it’s unclear who might receive debt relief through that new debt cancellation plan and when.
A more concrete change for borrowers is the new payment plan rolled out by the Department of Education this month, which intends to lower monthly payments and shorten the time people are required to pay on them.
It’s an income-driven repayment plan, which the department already offers in multiple forms, but the new plan, called SAVE, is the “most affordable plan ever created,” a Department of Education spokesperson said.
Under the SAVE Plan, a higher percentage of peoples’ discretionary income — the money leftover after basic necessities such as rent and food — will be shielded from loan payments, resulting in lower monthly bills.
And as is the case with other income-driven plans, once a borrower makes good on those payments for a set amount of time, usually between 20 and 25 years, the remaining loan is forgiven.
The new way that those payments are calculated under the SAVE Plan means that people earning less than $15 an hour will not owe loan payments, while borrowers earning more than that will save around $1,000 a year compared to the current income-driven repayment plans.
The plan also will bring major change to how interest accumulates for borrowers.
The SAVE Plan clears interest if a borrower is able to pay the monthly bill on the principal loan amount — eliminating the risk of a loan balance growing due to unpaid interest.
For example, FSA says, if a borrower has a $30 payment, but a balance of $50 including interest – when that $30 payment is made, the remaining $20 will be erased.
Each of those changes will take effect this summer, while two more changes will be implemented next summer. One will further reduce monthly payments, while another will decrease the payment period for people with smaller initial loans down to 10 years.
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