It is once again student loan season in the US, and many thousands of Americans are taking stock of their wallets to see if they can outlast the debt. Student loan repayments are a significant occurrence in the US economy and can even be considered as a macroeconomic variable that affects the country as a whole. The resumption of student loan repayments comes after a government-mandated break that sought to provide relief during the pandemic.
Over 43 million Americans enjoyed this welcome break and this month marks the beginning of once again factoring in loan repayment installments into their budgets, which on average, tends to amount to between $200-320. Fortunately, the Biden administration is currently implementing multiple initiatives to forgive student loan debts, which should help beneficiaries cope with climbing inflation levels in the country.
The newest forgiveness plan is even now being formed as a replacement for the program that was rejected just last year. The initial plan would have paid out $400 billion in debt relief – this would have allowed millions of recipients to receive about $10,000 or even more in loan cancellation. This program was blocked by the Supreme Court, prompting the new version. The latest iteration is being formed under the Higher Education Act in the US, as opposed to the previously considered HEROES Act of 2003. Forming the new scheme under the HEA is a complicated process involving the setting up of a committee of key stakeholders who then have to hold a series of hearings so that public input is factored into the process.
The program has now reached a key point in this process as the first of these hearings took place at the beginning of this week. The HEA gives the Secretary of Education the right to waive federal student loans, which the new scheme hopes to take advantage of. An issue paper released by the Education Department just last week also identifies five potential categories of borrowers who can qualify to have their loans forgiven through the new scheme. They include borrowers who suffer from high accrued interest and fees, borrowers who, for one reason or the other, haven’t managed to apply for a different forgiveness program, borrowers who are undergoing financial hardships, those who did not receive a good value for the program they attended and those who took out the loan many years ago.
The scheme, of course, is still in the works, and it is unlikely borrowers can benefit from it at any time soon. The public hearings alone will continue until December. The draft regulations should be released in 2024, which will open a fresh round of public comment. Finalising the scheme will likely take place at the end of next year. It is important therefore that the public is well-equipped to finance this payment among all their financial needs.
The first necessary step is taking a proper account of what you owe, and to whom. The extended break from student debt collection will likely have made everyone’s memory vague about how they used to do it. Student loans can also issued federally or via private banks. The interest rate you have committed yourself to will also depend on the time during which the loan was taken out. It is important that all such hidden facets of student loan repayment are taken into consideration as failing to meet one such consideration can result in extra penalties and fees for your insufficient payments.
Background research on your loans should include information provided by the government as well as private sources. The National Student Loan Data System for example provides extensive information on repayment plans for federal loans. A copy of your credit report will provide a list of your lenders, with whom you can talk to find out what options they offer.
An important precautionary next step is exploring other possible student debt repayment programs you can benefit from. The present legislation under review is not the only program that borrowers can benefit from. Various other not-for-profits as well as government agencies offer other loan-forgiveness programs open for various types of beneficiaries. Some employers also offer student loan repayment programs that their employees can benefit from. For example, any government position with a 501(c)(3) nonprofit offers the person who holds it student loan forgiveness programs after 10 consecutive years of making payments. Loan forgiveness is also often offered to people working in low-income areas and rural communities that lack in-demand professionals such as doctors, teachers, and social workers. It is important to carefully scrutinise any possible applications and contracts to ensure that you are not missing out on an opportunity.
Other programs you could stand to benefit from include refinancing and consolidating programs that cater specifically to student loans. While a refinancing option involves the negotiation of a new interest rate for student debt, it is important to check on whether the new rate is subject to change in the future, and in what direction it would be likely to change. It is even more important to be cautious of refinancing federal loans to private ones. This is because the switch would likely lose you certain benefits particular to federal loans. Refinancing for example could remove your student debt’s eligibility for future debt forgiveness.
Perhaps the easiest form of managing student debt is increasing your income to make the necessary payments. While one option is making the minimum payment regularly, the other is exceeding the minimum amount to benefit from a shorter debt period. However, considering that student loan debts take a significant time to pay off, paying more than the minimum amount will likely see you missing out on many opportunities in life in favour of paying the loan off quicker. Making smaller, regular payments will extend the time you spend in debt, and yet could stand to benefit from increased financial freedom to spend money on other, more enjoyable things. You can consider picking up a part-time job to put some money aside for the sole purpose of paying off your debts.
Whatever is said and done, no one can simply avoid paying their student debt loans. Neglecting to pay for 90 days makes you a delinquent while failing to pay for nine months makes you a defaulter, for which the consequences are severe. Even bankruptcy does not cancel the debt, as student debt does not have a statute of limitations. In the event of a financial crisis that stops you from making a payment, you can ask for a deferral or forbearance for the payment. These will not affect the credit score, and will in fact improve it once the payment is made. For a shorter-tem crisis, temporarily suspending payment should help you make ends meet: however, the debt will continue to accrue interest in the meantime. It is important to avoid defaulting at all costs: it is far better to get in touch with the loan provider to work out an acceptable solution.
(Theruni Liyanage)