3 big changes student loan borrowers could see when payments restart

Personal finance

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After a more than three-year reprieve, federal student loan bills will restart within months.

In the agreement to raise the debt ceiling, which President Joe Biden signed into law last week, there is a provision that officially terminates the pause on federal student loan payments and potentially makes it harder for the U.S. Department of Education to extend the stay.

As a result, the 40 million Americans with education debt will likely have their next due date in September.

Throughout the pandemic, the Biden administration has been working to overhaul the federal student loan system, meaning borrowers may notice a number of changes in place or on the horizon when they resume repayment.

Here are three of them.

1. Lower payments from forgiveness (maybe)

Last August, Biden rolled out an unprecedented plan to cancel $10,000 in student debt for tens of millions of Americans, or as much as $20,000 if they received a Pell Grant in college, a type of aid available to low-income students.

However, the administration’s application portal had been open for less than a month when a slew of legal changes forced them to shut it. The Supreme Court has agreed to hear two of those lawsuits against the plan.

The justices are still debating the validity of the debt-relief policy and are expected to make a ruling by the end of the month.

If the highest court greenlights the president’s program, roughly a third of those with federal student loans, or 14 million people, would have their balances entirely forgiven, according to an estimate by higher education expert Mark Kantrowitz.

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These borrowers likely won’t have to make a student loan payment again, Kantrowitz said.

For those who still have a balance after the relief, the Education Department has said it plans to “re-amortize” borrowers’ lower debts. That’s a wonky term that means it will recalculate people’s monthly payment based on their lower tab and the number of months they have left on their repayment timeline.

Kantrowitz provided an example: Let’s say a person currently owes $30,000 in student loans at a 5% interest rate.

Before the pandemic, they would have paid around $320 a month on a 10-year repayment term. If forgiveness goes through and that person get $10,000 in relief, their total balance would be reduced by a third, and their monthly payment will drop by a third, to roughly $210 a month.

But if the high court strikes down the policy, most borrowers will likely have the same monthly payment they had before the pandemic, Kantrowitz said.

2. A new income-driven repayment option

The Biden administration is working to roll out a new, more affordable repayment plan for student loan borrowers.

That option revises one of the four existing income-driven repayment plans, which cap borrowers’ bills at a share of their discretionary income with the aim of making the debt more affordable to pay off.

Instead of paying 10% of their discretionary income a month, under the new program — the Revised Pay as You Earn Repayment Plan — borrowers would be required to pay 5% of their discretionary income toward their undergraduate student loans.

Kantrowitz provided an example of how monthly bills could change with the overhauled option.

Previously, a borrower who made $40,000 a year would have a monthly student loan payment of around $151. Under the revised plan, their payment would drop to $30.

Similarly, someone who earned $90,000 a year could see their monthly payments shrink to $238 from $568, Kantrowitz said.

The payment plan should become available by July 2024, he said, although, “it is possible that the changes could be implemented earlier, as the U.S. Department of Education has the flexibility to implement regulatory changes sooner in certain circumstances.”

3. A new servicer handling their loans

Several of the largest companies that service federal student loans announced during the Covid-19 pandemic that they’ll no longer be doing so, meaning many borrowers will have to adjust to a new servicer when payments resume.

Three companies that managed the loans — Navientthe Pennsylvania Higher Education Assistance Agency (also known as FedLoan) and Granite State — all said they’d be ending their relationship with the government.

As a result, about 16 million borrowers will have a different company to deal with by the time payments resume, or not long afterward, according to Kantrowitz.

“Whenever there is a change of loan servicer, there can be problems transferring borrower data,” Kantrowitz said. “Borrowers should be prepared for the possibility of glitches.”

Affected borrowers should get multiple notices about their change in lender, said Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade group for federal student loan servicers.

If you mistakenly send a payment to your old servicer, the money should be forwarded by the former servicer to your new one, Buchanan added.

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