American student loan debt has soared to $1.774 trillion, more than the $1.031 trillion total for credit card debt. But, interest accumulation and payments were paused for the past few years because of the COVID-19 pandemic. However, student loan payments will resume in October, and some are not ready.

The high expense of college means student loans permit many to attend college when otherwise they might not have had the opportunity because of financial limitations. In many cases, the loans allow a person to complete an undergraduate or graduate degree leading to a job. 

This opportunity comes with a price. Students graduate with tens of thousands of dollars of debt that must eventually be paid back. The aggregate loan value has risen quickly from about $520 billion in 2006 to $1.774 trillion today. But for the past several years, students enjoyed a reprieve on interest and repayment. However, starting September 1, interest will accumulate again. Subsequently, loan repayments commence in October.

The Majority of Students Graduate with Loans

High college costs mean a majority of undergraduates and graduates borrow money at some point to complete their degree. In fact, 51.8% of those who complete an undergraduate degree use a federal loan to pay for some or all their educational expenses. The percentage is greater for graduate students, especially those who finished master’s or professional doctorate degrees.

The average federal student loan balance has climbed to $37,717, which is probably slightly higher if private debt is added to the total. However, the debt balance varies depending on the degree earned. People with bachelor’s degrees owe an average of $21,566. At the same time, those with a graduate degree must repay $102,400 on average.

Interest rates vary for loans depending on the source, type, and purpose. Loans directly to undergraduate students typically have the lowest rates. Additionally, subsidized loans are more favorable than unsubsidized loans because interest does not accrue during school, deferment, or grace periods.

COVID-19 Paused Student Loan Repayments

However, because of the COVID-19 pandemic, the federal government paused student loan interest accumulation and repayments. As a result, borrowers received more than a three-year break in paying their debt. 

A temporary six-month forbearance occurred early in the pandemic on March 13, 2020. Since then, the pause was extended nine times because the President had the authority to do so in a national emergency. However, borrowers should not expect another extension and instead, prepare for when student loans resume their payment schedule.

When Do Student Loan Payments Resume

In May this year, Congress passed the debt ceiling bill, including a provision to end the federal student loan repayment hiatus. When signed in June, the bill called for student loan interest and payment schedules to resume 60 days after June 30, 2023. Consequently, federal student loans will begin accumulating interest on September 1.

Furthermore, the administration announced a 12-month transition period, allowing borrowers to adapt to resuming student loan payments without the risk of default or entering collections.

A Transition Period Eases the Burden for Borrowers 

This staged approach means the interest accrues starting on September 1, and the first payment is due in October for the nearly 44 million people with federal loans except those in their grace period. The dollar amount and exact due dates are dependent on the terms.

The 12-month on-ramp means borrowers have until September 30, 2024, before they are considered delinquent for missing a payment. In addition, the Department of Education developed a new income-driven repayment (IDR) plan called the Savings on a Valuable Education (SAVE) program that may reduce monthly payments for those who qualify.

How Should Borrowers Adjust to Student Loan Payments

After a 3-1/2 year break, many debtors will face challenges when student loans resume. Additionally, students who graduated college during the forbearance period have yet to start payments and must prepare for a new monthly bill. Hence, borrowers should begin planning now.

Determine The Amount Owed and Monthly Payment

Three-and-a-half years is long, and companies managing a specific loan may have changed. A good idea is to identify which firm is servicing the debt by checking the Department of Education’s Federal Student Aid website. Afterward, update your contact information, check the total amount owed, and the monthly payment and due date. This information is necessary to create a new budget strategy.

Prepare a New Budget Strategy

When student loan payments resume, a new budget is needed to balance income and expenses. Millions of borrowers have likely become used to more cash flow for other expenses. This is about to change, and they need to be ready. Dawn Maybery Chestnut, CFP®, of Maybery Consulting, told Dividend Power, “Understand your payment amount, due date, and how to pay. Adjust your budget to accommodate this fixed expense.”

Explore Income-Driven Repayment Plans

For eligible borrowers, alternative payment plans may lower monthly payments and even lead to debt forgiveness. An IDR plan reduces monthly payments to a fixed percentage of discretionary income. Depending on income, the new payment could also be as low as $0. 

The new SAVE plan replaces the current REPAYE plan. An excellent way to proceed is to check the federal loan payment simulator to compare plans. Borrowers should talk to a financial planner to understand the workings of the latest IDR plan.

Prepare Ahead of Time for When Student Loans Resume

Student loan payments will restart soon, and debtors should plan ahead of time. According to Michael Acosta, CFP®, of Genesis Wealth Planning, LLC, “There is a lot to consider when making financial decisions that can positively or negatively impact what borrowers are required to pay…before making any decisions or changes with your student loans make sure you’re educated.”

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