Dos and Don’ts to Prepare for the End of Student Loan Forbearance
Last weekend, the White House press secretary told reporters that federal student loan payments would resume on February 1, 2022, after nearly two years of forbearance due to COVID-19. As the repayment deadline approaches, additional guidelines will be issued to help borrowers return to repayment. Most people have gotten used to not paying their loans for a very long time, so the transition will be uncomfortable. Here are some dos and don’ts that will help you make the transition.
MAKE preparations. For those who continued to make payments during the forbearance period, they may not need to do much else. In fact, their payments can be thought of as prepayments, meaning they won’t be considered past due if they miss a payment or two.
However, for those who did not pay during the forbearance period, they may not be able to pay the monthly payment due. If lifestyle changes aren’t enough, they’ll need to contact their lender as soon as possible to adjust their monthly payment. This can be done by providing the lender with financial statements or the most recent tax return if it shows lower adjusted gross income than in previous years.
And for those who default, this may be the last opportunity to rehabilitate their loans without having to make large payments.
As stated above, keep an eye out for updated information from the government or loan officers as they will provide instructions on restarting loan payments without accidentally missing a payment which can result in late penalties or a default status.
DO NOT bet on another extension. Yes, there are bad things going on in the world right now. The Omicron variant is spreading although there is no indication of new shutdowns and more PPP money. And yes, some people – even members of Congress – are asking for another extension of forbearance.
But the Education Ministry has made it clear that there will be no more extensions. It is possible that there will be another expansion, but it will likely happen if there is a massive catastrophic event. If there is another extension, so much the better. But until an announcement is made, pretend there isn’t one.
Look at all your options. Many people have changed jobs during the pandemic or are considering doing so. Some have lost their jobs or are underemployed. Your current position in life may offer you additional options.
If you have moved on to work for the government or a 501 (c) (3) nonprofit, you may want to consider applying for the 10 Year Public Service Loan Repayment Program. If you plan to work for the public sector for 10 years, your monthly payment will be part of your salary. After the 10-year period has passed, the remainder of your Federal Student Loan will be forgiven and the forgiven amount will not be taxed as income.
For those who have moved on to lower paying jobs, they may want to contact their lender to negotiate a lower monthly payment if they are on an Income Based Repayment (IBR) plan such as the traditional IBR plan, Pay As You. Earn or Revised Pay As you earn.
Those lucky enough to get higher paying jobs may have to pay a higher monthly amount as part of their IBR plan. Additionally, if it appears that they will repay their loan in full, they should consider refinancing their loan with a lower interest rate. This should be strongly considered as it is likely that interest rates will rise next year.
Don’t ignore your debt. For those who financed their studies exclusively with federal loans, they were living their dream of, for a short time, they were debt free. Some of these people think they can continue living this dream by ignoring their debt. Unfortunately, like cancer, student loans cannot be ignored or they will get worse and worse, especially as interest starts to accrue again.
Don’t wait until the last few days to make a plan or contact your lender. Not only will this put you in a more stressful position, but you may have to wait longer for a response as other borrowers in similar situations will frantically contact their lenders as well.
HAVE a long-term payment plan. It’s usually a good idea to have a repayment plan that lasts for several years, if not a decade. This does not mean that you should follow it strictly, as events may require you to make changes. But it can allow you to prepare for eventualities, manage your finances for other things like retirement savings, car or house purchases, family planning, and even the occasional vacation and splurge we deserve. all from time to time.
DON’T spend too much time online begging for a student loan discount. We keep hearing on the news that some politicians are demanding a student loan forgiveness of up to $ 50,000. If it were that simple, they would have already passed a Loan Cancellation Bill instead of extending loan forbearance started by the previous administration. Unfortunately, all of these no-action postures only create false hope for debtors who otherwise spend their time doing things that will help them pay off the debt and lead a normal life. The cancellation of the loan may or may not come. Until that happens, don’t turn it into a time-consuming obsession.
Getting back to normal also means repaying our student loans again. It is better to prepare and plan now rather than delay the inevitable.
Do you have the capacity to repay your student loans but choose not to? If so, contact me and tell me why.
Steven Chung is a tax lawyer in Los Angeles, California. He helps people with basic tax planning and with resolving tax disputes. It is also sympathetic to people with large student loans. He can be contacted by email at [email protected]. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.