Ready or not, the pause button on student loan payments will be switched back on again after next month.
In February, payments on federal student loans will resume for 43 million borrowers for the first time in almost two years since the Cares Act in March 2020 temporarily suspended all monthly payment requirements and dropped the interest rate to 0% on federal student loans.
“It’s as if your loans were in hibernation all that time,” said Mark Kantrowitz, a higher education funding expert based in Chicago. “You just pick up where you left off.”
Loan balances haven’t changed. But over the last 22 months, some other things may have.
Many borrowers may not live at the same address anymore. They might not have the same jobs or have the same financial ability to repay their student debt. The loan servicer might even be different for many people. About 16 million borrowers will make payments to a different lender than before the COVID-19 pandemic, according to the U.S. Department of Education.
After extending the payment pause on three previous occasions, the Department of Education announced in August that federal student loan payments will resume after Jan. 31, 2022, which is just shy of two years since borrowers were allowed to stop making payments.
Once payments go back into effect, so does the interest on the loan balances. The interest will start accruing again, as well as any collection activity on defaulted loans. That means wage garnishments and collection calls could become a harsh reality for borrowers who have fallen behind and failed to work out a financial agreement with their loan servicer.
Breathing room
The “payment pause and interest waiver” was meant to ease the financial impact of the COVID-19 pandemic on student loan borrowers.
Suspending payments and interest gave struggling borrowers some breathing room to focus on essential needs like rent and food. On the other hand, borrowers less impacted financially by the pandemic were able to get ahead if they used the money to save, invest or make a dent in their credit card debt.
A tiny percentage of borrowers used the opportunity to pay down the principal on their student loans while taking advantage of the zero interest rate period, according to data analyzed by Mr. Kantrowitz, author of the book “Who Graduates From College? Who Doesn’t?”
“About 1.2% of borrowers who were eligible for the payment pause and interest waiver continued making payments on those loans,” Mr. Kantrowitz said.
Since early fall, student loan borrowers across the nation have been receiving notices about the payment restart date from either their loan servicer or directly from the Department of Education. A survey of 34,000 student loan borrowers conducted by the Student Debt Crisis Center in November found that the majority of borrowers are aware of their payments resuming.
At a time when the national conversation is focused on the increased cost of living, and consumer inflation is hitting the economy, there is some worry that too many borrowers are still not financially ready to make loan payments again.
A survey conducted by The Pew Charitable Trusts in June found 67% of borrowers who responded said they would have problems affording their student loan payments if the bill were due the next month.
Some options are still available
Borrowers still struggling to make payments when February rolls around have some options that will keep their payments suspended longer, Mr. Kantrowitz said.
Most private student loan lenders ended their pandemic relief programs during 2020. Borrowers would need to apply for special payment arrangement directly with their lenders.
However, federal student loan payments can be deferred through an economic hardship deferment or an unemployment deferment. He said another option would be for borrowers having financial difficulty to switch their federal loans to an income-driven repayment plan.
Income-driven repayment plans are based on the amount by which a borrowers’ income exceeds 150% of the poverty line.
“If your income is less than 150% of the poverty line, your monthly payment would be zero for as long as that situation lasts,” Mr. Kantrowitz said.
“So, if you have no income because you still don’t have a job, an income-driven repayment plan will give you a zero monthly payment until you get back on your feet and have a job.”
‘Two years is a long time’
The landscape has changed for companies that specialize in collecting student loan payments, just as the whole system is poised to switch back on at once.
In July, the Pennsylvania Higher Education Assistance Agency — also known as FedLoan Servicing — notified the Department of Education’s Office of Federal Student Aid that it will not extend its 12-year-old federal student loan servicing contract when it expires on Dec. 14.
PHEAA, based in Harrisburg, handles over 8 million borrower accounts, and it is the primary servicer handling the Public Service Loan Forgiveness Program. FedLoan accounts will be transferred to a company called MOHELA, which is another loan servicer for the Department of Education.
Earlier this fall, Navient — a federal student loan servicer that handles 6 million borrower accounts — announced that it will also be exiting the Department of Education’s federal student loan servicing system.
Navient’s accounts will be transferred to another company called Maximus, which primarily handles collections on defaulted federal student loans on behalf of the Department of Education. Maximus will be doing business as Aidvantage, according to StudentLoanPlanner.com.
Mr. Kantrowitz said everyone’s payment will not be due on Feb. 1. Due dates are spread throughout the month. He also recommends that borrowers make sure their loan servicer has their up-to-date contact information.
“If you have signed up for auto-pay, where your monthly payment is automatically transferred from your bank account to your loan servicer, you may be asked to confirm that your bank account information is the same,” he said.
“Two years is a long time, and things may have changed.”
Tim Grant: tgrant@post-gazette.com or 412-263-1591
Correction, posted Dec. 15, 2021: The survey conducted by the Pew Charitable Trusts had previously been attributed to a different group.
First Published: December 13, 2021, 11:00 a.m.
Updated: December 13, 2021, 2:27 p.m.
