Student Loan Payment Restarting – How to Prepare Your Finances

Anna Yen, CFA, is a financial wellness expert with two decades of experience in financial markets. This includes on the trading floors of JPMorgan and as a Director at UBS. She specializes in personal finance, derivatives, and alternative investments including crypto.

Over to Anna.

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Student loan borrowers have enjoyed three years of reprieve from their education debts. Unfortunately, no matter how the Supreme Court decides on the Biden student loan forgiveness lawsuit, the student loan pause will end soon.

For many, rising interest rates and two years of high inflation has made transitioning to making payments challenging. Already, 53% of borrowers don’t feel financially secure, and the Bank of America predicts that “serious delinquencies” could soar by 67%.

We won’t sugarcoat it; preparing your finances to resume your payments may not be easy. But it’s not impossible – and Cleo is here to help.

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Talk with Your Loan Servicer

During the student loan pause, several federal student loan services exited the business, transferring millions of borrowers to new servicers.

If you haven’t done so – or haven’t checked your account in years – reach out to your servicer. Confirm your loan amount, payment and contact information, and due date.

You can also log into studentaid.gov to track down your servicer, loan details, and more.

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Review Your Budget

Once you know what you owe (and to whom), it’s time to find wiggle room in your budget to reintroduce your payments. Research suggests that the average student loan payment is around $503, though the median falls between $200-$299. That’s a big bite from any budget, no matter your income – but it’s possible to make it work.

Track Your Finances

First up, if you don’t have a budget in place, sit down and figure out where your money comes in and goes out. Familiarize yourself with your wants, needs – and ability to pay for both. (ICYMI: debt repayments fall under the “needs” category.)

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Cut The Fat

If you don’t immediately spot wiggle room in your budget, you may have to make some hard choices. Find out what “wants” you can cut, like switching from take-out to cooking at home or doing home yoga instead of going to the gym. (If possible, leave your emergency savings plan untouched so you don’t take on even more debt later.)

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Get Creative

Especially tight budgets may require a little more creativity to manage. You might start a side hustle or get a second job. Maybe you can trim your necessary expenses by moving to a cheaper neighborhood or carpooling with coworkers.

Sure, it sucks in the short-term – but so does having your wages garnished if you don’t pay up.    

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Get Back into the Habit

As you finagle your budget, start making your expected “payments” now into a savings account. Setting money aside early gets you back in the habit of not spending those dollars elsewhere. At the same time, you’ll build a little buffer if you need time to reshuffle your budget.

Alternatively, you can pay down your debt while interest rates remain at 0% – though that won’t last long.

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Find Savings Wherever You Can

As we near the end of the student loan pause, it’s time to get crafty with your finances.

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Sign Up for Automatic Repayments

Direct Loan borrowers automatically qualify for a 0.25% interest rate reduction just for turning on automatic monthly payments. That sounds small, but interest rate cuts slow compound interest, slash your monthly payment – and add up to big long-term savings.

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Make Your Payments in Installments

Another easy way to save is by breaking your monthly payments into two installments. This method pulls only half your payment per biweekly check, which may feel more manageable. Plus, making two smaller payments each month actually means you’ll accrue less interest long-term.  

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Pay Extra Each Month

Making larger payments that eat into your budget isn’t possible for everyone. But if you can afford it, paying even just $100 per month extra will pay off your loans faster and lower the lifetime impacts of compound interest – where you accumulate interest on interest costs.

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Pay the Bare Minimum

If you qualify for income-driven repayment with loan forgiveness as an option, you might consider making only the minimum payment until your debt is cancelled.

However, this isn’t a risk-free strategy. If your income exceeds the threshold to qualify before your debt is cancelled, you’ll have to pay the rest yourself. (Including all that extra interest that’s accrued.)

In other words: weigh your finances and future very carefully before making this move.

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Select the Right Repayment Option

Federal student loans have a standard repayment period of 10 years, but you’re not necessarily locked into that box.

Some borrowers qualify for other pathways to payoff, like income-based plans and even forgiveness after 10 to 25 years of payments. Some low-income borrowers also qualify for new payment schemes that drop payments to $0 without accumulating interest.

If your financial circumstances have changed since the student loan pause began, you can explore your options, eligibility, and potential payments at studentaid.gov.

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Check Your Eligibility for Loan Forgiveness

Unfortunately, borrowers can’t count on the Biden student loan forgiveness plan succeeding in court. (Though experts argue other pathways to forgiveness exist.)

But that doesn’t mean you don’t qualify at all. Studentaid.gov outlines other ways borrowers may receive forgiveness through working certain jobs or having attended particular colleges.  

The Education Department is also issuing a one-time payment adjustment, or IDR waiver, to address “historical failures in the administration of the federal student loan programs.” This waiver gives qualified borrowers credit toward having their loans forgiven faster, even if they missed past payments.

The Department estimates the IDR waiver wipes out loans for around 40,000 borrowers and apply three years of credit to 3.6 million others.

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Consider Consolidating and (Reconsider) Refinancing

Consolidating federal loans involves combining several loans into one new loan with a single payment. The process may allow you to adjust your loan term and/or interest rate, which could lower your monthly payment.  

Federal borrowers can also apply for a private loan to refinance existing federal loans. While you may get a lower interest rate, beware: private refinancing forfeits all federal loan benefits, including eligibility for the Biden student loan forgiveness plan.

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Defaulters: Consider the “Fresh Start” Program

Borrowers who defaulted before the pandemic have one unique chance to get back in the government’s good graces via the Fresh Start program.

Fresh Start makes your loans “current” again and removes the default from your credit history. The program also stops debt collection efforts, and some borrowers may qualify for additional aid or long-term loan forgiveness plans again.

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Make a Plan if You can’t Make Payments

Real talk: some borrowers just…won’t be able to afford their payments right away. The economy is in a weird place, inflation and interest rates are competing for every last dollar, and the housing market is f***ing nuts.

If you fall into that bucket, it’s time to look for additional deferment or forbearance options. These allow you to temporarily reduce or postpone your payments until you can get your finances to a better place.

However, these are band-aid solutions. Interest may still accrue (depending on your plan), and you may have higher monthly payments when your loans inevitably come due again.

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The student Loan Pause Is Ending – but Life Goes on

The student loan pause gave millions of borrowers a chance to breathe during a tough time. Unfortunately, with Biden student loan forgiveness unlikely to succeed, borrowers have to find room in the budget to restart their payments.

But knowledge is power, as they say. Once you know what you owe, you can get creative to lower your payments, get your loans current, and reshuffle your budget.

When you’re ready to get started, Cleo’s budgeting tools are here to help. (and roast you into oblivion for your spending choices, if you like) We’ll work with you to find the optimal budget for your situation and provide insights to better your finances. We’ll even front you some cash to get through a tight spot so you can keep working toward your goals.

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Big love. Cleo 💙