Government collection activities resume next year
Anyone who has federal student loans knows that payments have been suspended and interest rates have been set at 0% for much of 2020 and all of 2021. Meanwhile, the federal government has also suspended payments. delinquent federal student loan collection activities during this time – a pause that is still in place today.
The emergency deferral period, which was put in place to provide emergency COVID-19 assistance in March 2020, is currently scheduled to expire on January 31, 2021. This means that the garnishment of wages and compensation for returns Income and Social Security will pick up for delinquent borrowers at that time.
Student loan expert Mark Kantrowitz says that at present, he are proposals to rehabilitate the loans of up to 7 million delinquent borrowers. However, it remains to be seen if the current main plan (called “Operation Fresh Start”) will ever materialize, or how it might work in real life.
The bottom line: Borrowers with federal student loans will need to pick up where they left off with their monthly payments on February 1, 2022. Additionally, borrowers with delinquent federal student loans should expect to be back where they started when. the pandemic has set in – a situation where wage garnishment and other hassles are on the table until they get back on track.
What should defaulted borrowers do?
According to Rebecca Safier, a certified student loan advisor who works for Student loan hero, borrowers with past due student loans now have a few options to consider that could help them prepare for next year. For starters, they should look for ways to get their loans back into good standing, she said, adding that the government is offering two main ways to revive delinquent federal student loans: pardon and consolidation.
With loan rehabilitation, your next steps depend on the type of federal student loans you have. If you have defaulted on Direct Loans or FFEL Program loans, for example, you will need to contact your loan manager and agree to make nine voluntary and reasonable payments on your loans within 20 days of the due date. From there, you will make the nine payments over a period of 10 consecutive months. Generally speaking, your “reasonable monthly payment” will correspond to an amount corresponding to 15% of your annual “discretionary income” divided by 12.
With loan consolidation, on the other hand, you will start by consolidating your delinquent federal student loan into a direct consolidation loan. At this point, you can agree to repay your new direct consolidation loan on an income-based repayment plan, or you can make three consecutive, on-time voluntary payments on your overdue loan before consolidating it.
“Both of these approaches have pros and cons, so it’s worth learning about your options now so you can be ready next year,” Safier said.
The financial expert also says that it might be helpful to contact your loan officer to discuss your options and how to take out your loans in the event of default. No matter what you do, don’t wait until the forbearance ends to make a plan for your student loans.
“This break in payments gives you the opportunity to explore the different repayment plans and rebate programs and determine the best approach for you,” she says.
Financial Advisor Josh Simpson of Lakes Advisory Group in Lady Lake, Florida, also agrees that the first step should be to contact your student loan service company to see what options are available to you. However, you may run into obstacles if your current loan manager is the one who will no longer serve federal student loans in the next few months, he says.
In this case, you can wait to receive notice from your new loan manager and contact them to find out about your options or to communicate your current plans to begin loan rehabilitation or consolidation.
“Planning is the key, whatever stage of life you find yourself in, a failure to plan is a plan that fails.”
What if you can’t pay your monthly student loan?
You may have been up to date on your student loans before the pandemic, but your financial situation has changed significantly since the current deferral period began. You might even be faced with a student loan repayment that you can no longer afford, and a situation where your loans could be in arrears within a few months.
In this case, you can check the establishment of an income-based repayment plan if possible or request an extension of the forbearance until you believe that it will be possible to start making payments, explains Simpson. No matter what you do, Simpson says you shouldn’t bury your head in the sand.
Jeff Cimini, Retirement Product Management at Voya Financial, also indicates that individuals can turn to their employers for help.
“Many companies now offer assistance in this area, some even offering direct payment assistance for student loan repayments, in which employers make direct after-tax contributions to their employees’ student debt managers,” explains Cimini.
“For those who might be looking for new employment opportunities, or those who are in the workforce, consider asking your benefits administrator about your options.”
While getting help with student loan repayments from your job might seem unlikely, there are some tax advantages that make it a good decision for businesses. In fact, a provision in the CARES Act extended a tax benefit for businesses until December 31, 2025. This provision allows businesses to contribute up to $ 5,250 tax-free to student loans or tuition fees. of an employee, and it is tax-free for the employee and the employer.
There are several options for determining if your loans are already in arrears or if you are concerned that they will be in arrears soon. And while none of them are ideal, it’s always best to start on a path to better financial life, no matter how flawed that path is.
“Figure out how much you potentially have to pay, make a plan to pay off those debts, and execute the plan,” says Simpson. “It’s only three steps, anyone can do it if they think about it.”
With a few months of February 2022, that sounds like great advice that everyone should follow.