Oct 30, 2024
Since the start of the COVID-19 pandemic, student loan borrowers have faced a series of ever-changing rules, false starts on loan forgiveness and confusion. Payments were paused during the pandemic and the Biden administration tried to implement widespread loan forgiveness as promised during the president's campaign, but the courts kept striking down proposals.
Now, an important deadline has passed. The "on-ramp" period that spared borrowers from severe consequences of non-payment ended on Sept. 30, 2024, and those who haven't been paying now need to take action to avoid significant financial damage. But the problem is that some may not want to because they're still hoping their loans will be forgiven.
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Unfortunately, if you don't resume payments now or make a plan to avoid them through approved processes like deferment or forbearance, there could be serious consequences. Here's what you need to know.
Many are hoping for forgiveness
During the pandemic, the Department of Education (ED) paused student debt payments. While payments resumed in October 2023, the ED created an on-ramp period to provide an extra year of flexibility.
During this on-ramp period, interest would accrue but borrowers wouldn't be reported as delinquent to credit agencies.
Many took advantage of this grace period. In fact, Pew found that, as of this past summer, 13% of borrowers who owe money on federal student loans were not making payments during the on-ramp period. Among lower-income households, an estimated 32% of borrowers earning a household income of under $25,000 were behind on their student loan payments.
Stringent finances may be preventing borrowers from sending in payments — but others might be hesitant to pay what they owe and in the hopes forgiveness will pan out after President Joe Biden made eliminating student debt a centerpiece of his campaign.
Biden has put forth numerous forgiveness initiatives or plans to reduce the debt burden, many of which have been challenged or put on hold by the courts.
This has resulted in a "bunch of confusion" for borrowers, Zamir Baez of Boston told Bloomberg. "I don't want it to impact my finances, but it's also not clear what the consequences will be to not making payments."
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Potential changes to the federal government, including a new president entering office in 2025, only adds to the uncertainty. But despite any hopes of possible future loan forgiveness, financial consequences may be on the way to anyone with student debt now that the on-ramp period has ended.
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Waiting on forgiveness could be a disaster
If you're hoping to hold off on paying student loans in case they're forgiven, there are some big problems with that approach.
For one thing, now that the on-ramp period is over, borrowers face serious consequences if they don't pay. Loans will considered delinquent the day after you miss a payment. Once you're 90 or more days late, this will be reported to the credit reporting agencies, potentially doing severe damage to your credit history.
If you miss payment for 270 days, your loan will go into default, and that's when things get even worse. Not only will your credit be badly damaged, but you'll also owe the entire unpaid balance of your loan, become ineligible for deferment or forbearance, lose the ability to pick your payment plan, lose eligibility for additional federal student aid and face collections activities like wage garnishment and seizure of your tax refunds and federal benefits.
Instead of letting this happen, it's best to be proactive and explore your options. If you can afford it, you may want to start making payments again on your previous plan. If that's not feasible, switching to an income-driven plan can be more affordable by capping payments at a percentage of income.
You may also want to consider pausing payments through deferment or forbearance. But keep in mind that in most cases interest will continue to accrue, adding to your loan balance.
The bottom line is it's probably not a good idea to let your credit and financial flexibility be damaged in hopes of student debt forgiveness that may never come. If you pursue a solution now that the ramp-up period is over and start tackling your student debt, you find your way toward putting these loans behind you once and for all.
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Christy Bieber has 15 years of experience as a personal finance and legal writer. She has written for many publications including Forbes, Kilplinger, CNN, WSJ, Credit Karma, Insurify and more.
