What to do if you can’t afford to repay your student loans?

The COVID-19 pandemic has disrupted the lives and finances of millions of people, including those with student loans. The federal government has provided some relief by suspending interest and payments on most federal student loans until October 2023, but what happens after that? Here are some things you need to know if you are worried about resuming your student loan repayments.

student loans

The on-ramp program

The Biden administration has announced a one-year grace period for borrowers who miss or are late on their student loan payments after October 2023. This program, called the “on-ramp”, is designed to help borrowers avoid the harshest consequences of delinquency and default, such as damage to their credit scores, collection fees, wage garnishment, and loss of eligibility for other federal benefits.

The on-ramp program will automatically apply to all borrowers with federal student loans, regardless of their repayment plan or status. Borrowers who participate in the on-ramp program will not be reported to the credit bureaus, will not be considered in default, and will not have their loans sent to collection agencies. However, interest will continue to accrue on their loans during this period, which means their balances will grow and they will end up paying more over time.

The SAVE program

Borrowers who are struggling to make their student loan payments may be eligible for another option that could lower their monthly payments and even forgive some of their debt. This option is called the Student Aid Verification Enhancement (SAVE) program, which was launched by the Education Department in July 2023.

The SAVE program allows borrowers to enroll in income-driven repayment plans, which adjust their monthly payments based on their income and family size. Borrowers who enroll in these plans can pay as little as $0 per month if they have no or very low income. Additionally, borrowers who make consistent payments under these plans for 20 or 25 years (depending on the plan) can have their remaining balance forgiven.

To enroll in the SAVE program, borrowers need to verify their income and family size with the Education Department. This can be done online through the StudentAid.gov website or by submitting a paper form. Borrowers who enroll in the SAVE program before October 2023 can also benefit from the interest and payment suspension until then.

The consequences of non-payment

Borrowers who do not pay their student loans after October 2023 and do not enroll in the on-ramp or SAVE programs may face serious consequences that could affect their financial future. Some of these consequences include:

  • Damage to their credit scores, which could make it harder for them to get approved for mortgages, car loans, credit cards, and other forms of credit.
  • Collection fees, which could add up to 25% of their loan balance and increase their debt.
  • Wage garnishment, which could take up to 15% of their disposable income and reduce their take-home pay.
  • Tax refund offset, which could seize their federal and state tax refunds and apply them to their loan debt.
  • Social Security offset, which could withhold up to 15% of their Social Security benefits and apply them to their loan debt.
  • Loss of eligibility for other federal benefits, such as deferment, forbearance, forgiveness, consolidation, and rehabilitation.

The bottom line

Borrowers who have student loans should be aware of the options and consequences that they face when repayments resume in October 2023. If they can afford to pay their loans, they should do so to avoid interest accumulation and save money in the long run. If they cannot afford to pay their loans, they should consider enrolling in the on-ramp or SAVE programs to reduce or eliminate their payments and avoid negative impacts on their credit and finances. Borrowers who need more information or assistance with their student loans should contact their loan servicers or visit the StudentAid.gov website.

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