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| © Getty Images | An income-driven repayment plan may be your best option if you can't afford your payments. |
By Anna Helhoski, NerdWallet
Federal student loan borrowers haven't had to make payments since March. But without continued government intervention, those unable to pay can expect long waits for help come October when bills are scheduled to restart.
Automatic, interest-free forbearance provided by the first coronavirus relief package was not extended by the Health, Economic Assistance, Liability Protection and Schools Act proposed by Senate Republicans. There’s no additional relief for student loan borrowers in the proposal.
While that legislation could still change, your best safeguard if your job or finances are shaky is to act now.
“It’s a disaster waiting to happen,” says Seth Frotman, executive director of the Student Borrower Protection Center, a Washington, D.C.-based nonprofit.
Restarting payments for tens of millions of student loan borrowers will likely lead to delinquencies and defaults, says Frotman. And there’s precedent for his assertion: Data from the Education Department in 2019 shows defaults increased when forbearances expired after natural disasters.
On top of that, the number of borrowers affected by the pandemic dwarfs any previous challenge for student loan servicers.
The servicing system was “never meant to handle high volatility moments; it was built to handle servicing on a normal cycle,” says Scott Buchanan, executive director of Student Loan Servicer Alliance, a nonprofit trade association representing student loan servicers. Buchanan urges borrowers to contact their servicers today for guidance.
You don’t have to wait for congressional approval to take control. If you don’t think you can handle your monthly payments, an income-driven repayment plan is your best option to avoid default. Here’s why you should enroll now and what your other choices are.
Opt for income-driven repayment
Federal loan borrowers can — and should — apply now for income-driven repayment. Each of the four plans available will cap payments at a percentage of your income and extend repayment to 20 or 25 years, with any remaining balance forgiven at the end.
The most broadly available plan, Revised Pay As You Earn, or REPAYE, caps payments at 10% of discretionary income. If you have no income, or your income is at or below the poverty line, your payments would be zero.
It’s vital to enroll as soon as possible. Many student loan borrowers who are out of work may apply for income-driven repayment all at once, which is likely to overwhelm the servicers. You’re more likely to get your application approved sooner if you apply now.
“This is the moment for you to reach out and call us so we can talk specifically about your situation,” says Buchanan.
He adds that servicers are planning outreach to borrowers in the coming weeks. In the meantime, they're internally discussing increased staffing to meet an influx of demand from student loan borrowers.
Recertify your existing income-driven repayment plan
Federal loan borrowers already enrolled in income-driven repayment must recertify their income each year or revert to a standard repayment plan.
If you’ve had a change in income, now is a good time to update the amount with your servicer. Recertification will make sure your payments are updated and affordable.
The fastest way to recertify your plan is at studentaid.gov, but a paper form is also available.
Request another payment pause — this time with interest
Your alternate option is to pause payments through forbearance or an unemployment deferment. Neither is quite like the payment pause you currently have — you have to request it, and interest will likely accrue during the entire pause and increase the total you owe. To prevent this, you can ask to make interest-only payments during these periods.
- An unemployment deferment allows you to postpone repayment for up to 36 months. You must be receiving unemployment benefits or working part time while seeking full-time work. Only apply for an unemployment deferment if you know you’ll be out of work for a short period of time and if you can prove you have looked for a job at least six times within the last six months. Otherwise, an income-driven repayment plan is the way to go. Interest won’t accrue on subsidized loans during an unemployment deferment.
- A forbearance is a last-ditch effort to avoid student loan default, which could lead to your wages being garnished or your tax refund being seized. Interest will accrue on all your loans and be added to your balance at the end. Only use forbearance if you can’t pay your loans, you plan to restart repayment soon and you won’t qualify for an unemployment deferment. You can request a forbearance with your servicer.
Ask your private lender about hardship options
Private student loan borrowers were left out of the original Coronavirus Aid, Relief, and Economic Security Act as well as the HEALS Act.
But private lenders usually offer student loan forbearance or can temporarily lower your payments, though these options are far less generous than federal ones. Private lenders are also making relief options available temporarily to borrowers facing financial challenges. Options like additional temporary forbearance periods won’t count against existing limits.
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