Steve Helber/AP/File
In this June 2019 photo, a student works in the library at Virginia Commonwealth University in Richmond, Virginia.
WashingtonCNN –
For the first time in more than three years, student loan payments are due in October – but for the next 12 months, borrowers will be able to skip payments without facing the harsh financial consequences of defaulting on a loan.
The Biden administration envisages a so-called “on-ramp period” until September 30, 2024. During this time, a borrower will not be reported to national credit rating agencies as defaulting, which can affect a person’s credit rating.
Think of it as a grace period for missed payments. However, interest continues to accrue, so borrowers are not completely out of trouble.
Here’s what borrowers need to do knowledge:
Any federal student loan borrower who was eligible for the pandemic-related payment pause that went into effect in March 2020 is eligible for the “on-ramp” period. This includes borrowers with Federal Direct Loans, Federal Family Education Loans and Department of Education Perkins Loans.
Borrowers do not have to apply for the benefit.
Typically, a federal student loan goes into default on the first day of default. Credit servicers report late payments to the three national credit bureaus if a payment is not made within 90 days.
A loan goes into default when a borrower fails to make at least one payment 270 days or approximately nine months, which can have further financial consequences.
Missing a payment can further impact your credit score and make it more difficult to purchase a car or home. It could take years to restore good credit. Borrowers could also see their federal taxes refunded or even a portion of their pay withheld.
Once the borrower defaults, the borrower will no longer be eligible for deferment or forbearance and will lose eligibility for additional federal student aid. At this point, the borrower can also sue the borrower in court.
With the pandemic-related payment pause over, interest rates will resume from September 1, after effectively setting interest rates at 0% for more than three years.
That means if a borrower misses a payment now, he or she could end up with even more debt over time based on interest.
If interest rates rise, a borrower’s loan servicer may also increase monthly payment amounts to ensure the debt is repaid on time. (This will not be the case for borrowers participating in income-driven plans, where payments are calculated based on income and family size.)
And unlike during the pause, a missed payment means a borrower misses out on a month’s worth of student loan forgiveness credit under certain repayment plans.
For example, for borrowers participating in the Public Service Loan Forgiveness Program, each month during the pause will continue to count toward the 120 monthly payments required to qualify for debt forgiveness.
Before missing a payment, it might be worth considering switching to an income-driven repayment plan, which could lower monthly payments.
A new income-driven repayment plan called SAVE (Saving on a Valuable Education), introduced this summer, offers the most generous terms and will likely offer the smallest monthly payment for lower-income borrowers.
Under SAVE, a single borrower making $32,800 or less or a borrower with a family of four making $67,500 or less will have their payments set at $0.
Borrowers can request a new repayment plan at any time and free of charge, but should allow at least four weeks for the change to take effect.
Borrowers who defaulted before the start of the pandemic pause in March 2020 can apply for the Department of Education’s Fresh Start program.
When borrowers use Fresh Start to get out of default, their loans are automatically transferred from the Department of Education’s Default Resolution Group to a loan servicer and returned to “In Repayment” status, and the default is removed from their credit report.
To receive these benefits, log on to myeddebt.ed.gov or call 800-621-3115. According to the Department of Education, the process should take about 10 minutes.