Student loan collections or recovery processes resume on May 5th; here are crucial points to understand.
After a pause due to the pandemic, federal student loan collections are set to start again on May 5. Here's what borrowers need to know to avoid default and manage their payments.
Collections Resumption
With collections back in action, the last piece of the student loan machine has been activated, officially ending the relief period that began in March 2020. The resumption of collections means that tax refunds, Social Security benefits, and other federal payments can be withheld to pay off your debt.
If you have fallen behind on your payments, you should expect to see your credit score suffer as penalties begin to accrue. More than 5 million borrowers are currently in default, and many more are projected to be on the verge of default.
Consequences of Default
If your loans remain in default, there are serious consequences. The government can seize your entire tax refund (up to the amount of your debt) and up to 15% of monthly Social Security retirement and disability benefits, as well as your paycheck.
To avoid default, you have several options. You can consolidate your loans or rehabilitate them by making nine out of ten consistent, “reasonable” payments, determined by loan holders using a formula.
Paying Off Your Loans
Consolidation is typically the easiest solution if you have multiple loans. This combines them into one federal Direct Consolidation Loan, effectively paying off the old ones.
However, consolidation has its drawbacks, especially for borrowers in income-driven repayment plans, which forgive any remaining debt after a period tied to your income and household size. After consolidation, you lose any credit earned towards loan forgiveness.
Income-Driven Repayment Plans
If you can't afford your payments, income-driven repayment plans can provide some relief. However, the landscape has recently been shaken up by legal challenges to the more affordable SAVE plan introduced by President Biden. As a result, there are fewer income-driven options available.
The remaining programs include Pay as You Earn (PAYE) and Income-Based Repayment (IBR) plans, where monthly payments are 10% of discretionary income for 20 years. Another option is the Income-Contingent Repayment (ICR) plan, which requires payments of 20% of discretionary income for 25 years.
Beyond these options, you can consider extended repayment plans that lower your monthly obligation by extending the loan term or deferring payments through forbearance.
Online Resources and Updates
To check your loan status, log into your account on the federal website, StudentAid.gov. Make sure your contact information is up to date, both on the website and with your loan servicer.
The Education Department is working on restoring processing for income-driven repayment plans, with an expected start in May. Borrowers who have fallen behind on payments may receive email notifications from the Federal Student Aid office urging them to contact the Default Resolution Group for help.
Stay informed about updates to your student loan repayment plan by checking the Education Department's website and the Loan Simulator tool, which can help you evaluate and compare your repayment options. Contact organizations like The Institute of Student Loan Advisors or your state's student loan ombudsman office for additional assistance.
Sources:
- N.A. (2023). Millions of student loan borrowers are behind on payments. Here comes the hammer. The New York Times. Retrieved from https://www.nytimes.com/2023/02/15/business/student-loans-pandemic-relief.html
- N.A. (2023). Biden tries again at student loan cancellation, this time for those with financial hardships. The Washington Post. Retrieved from https://www.washingtonpost.com/politics/2023/02/13/student-loans-debt-forgiveness-biden/
- N.A. (2023). Biden's student debt plan is in limbo. Confused? Here are some answers. The New York Times. Retrieved from https://www.nytimes.com/2023/02/15/business/student-loans-pandemic-relief.html
- Borrowers in Seattle may find it helpful to explore income-driven repayment plans, such as Pay as You Earn (PAYE) or Income-Based Repayment (IBR), to manage their student loan payments as collections resume.
- For those considering business or education-and-self-development opportunities in Seattle, it's important to be aware that default on student loans can result in the government seizing tax refunds, up to 15% of Social Security benefits, and even a portion of paycheck, making financial planning crucial.
- If you're based in Seattle and eager to support local businesses and the community, consider contributing to education initiatives, like scholarships or school programs, as an alternative to directly funding student loan debts, which would not only benefit the community but also incentivize students to focus on their studies and future careers.
