The end of the student loan grace period could be dangerous for borrowers

October 2, 2024 Add Comment
The end of the student loan grace period could be dangerous for borrowers

The 12-month grace period for people who owe student loans finished on September 30. The “on-ramp” phase helped people who were having trouble making their payments stay out of default, which would have hurt their credit score.

“When the on-ramp period ends, things could get very bad for people with student loans who can’t make payments,” said Persis Yu, Deputy Executive Director at the Student Borrower Protection Center.

There are about 43 million Americans with $1.5 trillion in student loan debt. About eight million of those borrowers had signed up for the SAVE plan, which was the newest income-driven payback plan that made it easier for borrowers to make monthly payments that they could afford. But this plan is on hold right now because of legal issues.

Yu also said that student loan borrowers who are having trouble making their monthly payments have fewer choices now that the on-ramp period and a separate program called Fresh Start are over.

The SAVE plan has also been put on hold. People who have student loans and haven’t been able to make their monthly payments should think about what they can do to avoid getting into default.

What you need to know if you have student loans

The Education Department set up this relief period to make it easier for borrowers to start making payments again after a three-year break caused by the COVID-19 pandemic. People who borrowed money were told to keep making payments during this year because interest kept adding up.

“Usually, loans will go into default if you don’t make payments for about nine months. But during this on-ramp period, missing payments would not put people in default and make them pay for back the loan.”

“But if you missed payments, you would still be behind on paying back your loans in the end,” said Abby Shaforth, who runs the Student Loan Borrower Assistance Project for the National Consumer Law Center.

Now that the grace period is over, people who don’t make their student loan payments will become delinquent or, after nine months, go into default if they haven’t been paid.

People who borrow money but can’t pay it back can ask for delay or forbearance, which stop payments but keep interest accruing.

Consequences of failing to pay

Nonpaying borrowers risk delinquency and default. That can ruin your credit and disqualify you from government aid.

Shaforth said borrowers will receive email alerts after missing one month’s payment. Lenders notify credit reporting agencies of unpaid loans after three months, impacting your credit history. The debt defaults after nine months of nonpayment.

If you’re struggling to pay, advisors recommend checking if you qualify for an income-driven repayment plan, which bases payments on expenses. Visit the Federal Student Aid website to check eligibility. The Public Service Loan Forgiveness Program forgives college debt after 10 years for government and non-profit workers.

A debt is in default on your credit record after 270 days, or 9 months.

Defaulted loans go to collectors. Without a court order, the government can garnish salaries, intercept tax refunds, and confiscate Social Security checks and other benefit payments to repay the loan.

Know how to avoid student loan default and delinquency if your budget won’t allow you to resume payments. Both can lower your credit score, disqualifying you for aid.

Deferment or forbearance may allow you to temporarily delay payment if you’re in financial trouble.

Contact your loan servicer to discuss deferment or forbearance. Interest continues during delay or forbearance. Both may affect loan forgiveness. The terms of your deferment or forbearance may require you to pay interest during the suspension.

Federal student loan repayment arrangements are available from the Education Department. Under the conventional plan, debtors pay a fixed monthly amount to repay entire debt after 10 years.

You can enroll in one of several plans with reduced monthly payments based on income and family size if you can’t afford that amount. These are income-driven repayment plans.

Long-standing income-driven alternatives cap monthly payments at 10% of a borrower’s discretionary income. A borrower’s bill is zero if they earn little. Any leftover debt disappears after 20–25 years.

The Supreme Court halted the SAVE plan, an income-driven repayment plan that would have slashed payments for millions of borrowers, in August while lower courts heard lawsuits.

Eight million SAVE borrowers don’t have to pay their student loan bills until the legal dispute is settled. The strategy did not effect forgiven debt.

Oct. 15 is the next court date for this case.

Fresh Start, which helped delinquent borrowers before the epidemic payment suspension, ended on Sept. 30. During this brief program, pre-pandemic student loan debtors could remove their loans from default and apply for income-driven payment plans or deferral.

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