And The Curtains Fall on the Federal Student Loan Payments’ Protection: But, What Does This Really Mean?
Tick tock! Brace yourself, friendly borrower, because the ‘Get Out of Jail Free Card’ for federal student loan payments is set to, well, stop getting you out of jail for free today.
This honeymoon period, fondly termed as the “on-ramp”, was that friendly neighborhood Spider-Man shielding folks from the worst of missed student loan payments. The superhero was first introduced when those monthly bills started pouring in last autumn, after taking a generous hiatus of three years (cheers to the pandemic, eh?). But guess what, the Spider-web is about to disappear into thin air because the lovely on-ramp ride concludes on Monday, September 30th.
Lo and behold! The hawks are now out as borrowers come face-to-face with tougher enforcement. And what’s worse? Easier repayment plans are still deep in slumber. There’s a murky legal tussle holding back the White House’s efforts to fix the whole student debt predicament, leading to a hold on applications for the new Saving on a Valuable Education (READ: SAVE) repayment plan. Also, the loan servicers are instructed to stop entertaining applications for the ever-popular income-driven repayment (IDR) plans, the saviors that once led to lesser monthly payments.
How About Some More Breathing Room, Eh?
Thanks to these stringent limitations, consumer advocates, and policy nerds are going all out, begging the U.S. Department of Education to carry on with the on-ramp Mardi Gras.
“Borrowers who are swimming in trouble right now are basically left to drown because viable options just aren’t there,” cries out Abby Shafroth, the godmother of the Student Loan Borrower Assistance Project at the National Consumer Law Center. “There’s a lot of head-scratching about what options still exist.” Depressing, isn’t it?
To stop this circus, several organizations, including the National Consumer Law Center, sent a heartfelt plea to the department, hoping for an extension of the on-ramp until those legal challenges wrap up and loan servicers manage to clear the IDR applications’ logjam. Without another gentle push, warns Shafroth, borrowers may find themselves slipping in October and November, resulting in quite the financial faux pas that has not been seen in years.
While all this unravels, the lifeline AKA Fresh Start, although due to wind up soon, has managed a last-minute extension. Breath of relief anyone? Alas, it’s short-lived as this beacon of hope is now set to conclude come Wednesday, October 2nd, thanks to some technical glitches.
Decoding: What Was The On-Ramp Period?
March 2020: Last time, student loan payments graced the wallets of borrowers before they went on a secret trip to Narnia, leaving people scrambling to revaluate their budgets after a well-deserved break from monthly bills.
The friendly on-ramp policy was a beacon, a protector of sorts, snugly cushioning borrowers who grappled with payments. The policy kept the big bad wolves of penalties far away in the dark lord’s forest. Despite whispers of accruing interest, missed payments were treated like Voldemort’s name to credit bureaus – not uttered. Lapses were also given a pass when considering delinquency or loan default during the blessed period.
In a nutshell, between the pandemic payment hiatus and the on-ramp, borrowers managed to sneak past the worst consequences of missed federal student loan payments (all for a whopping four and a half years!). However, hold onto your seats because starting next week, missed payments could turn into your worst nightmare, severely denting your credit score. Sleep on payments for close to 9 months, and you’re headed straight into the jaws of the loan default monster. Picture garnished wages and interceptions of tax refunds or Social Security benefits. I know, not a happy place.
On-ramp protections worked wonders, to say the least. A Government Accountability Office report showed that nearly 30% of borrowers were found stranded in a debt-ridden island a few months after resumed payments in 2023. About 6 million still owe more than 90 days of payments. Yikes!
Can We Please Stay on the On-Ramp for a Wee Bit Longer?
The National Consumer Law Center, along with a constellation of other advocacy stars, was the first to raise an eyebrow at the audacity of the impending on-ramp expiration. The Center for American Progress popped in recently, begging the Education Department to cut folks some slack and postpone the stricter penalties. The group gave a shout-out to the complex student loan repayment scenario and ongoing tussles with loan servicers. SAVE, the planned knight in shining armor repayment plan, sadly lies shrouded in legal quagmires.
“This on-ramp was a lifeline, but given the ongoing war over the SAVE plan, it’s not enough,” the group voices.
The Department of Education continues to hide behind the bushes, refusing to address concerns about the on-ramp extension. In fact, the Department seems to have vanished as they also did not respond to Money’s request for comment.
Interestingly, a minuscule chance of last-minute extension exists. But Shafroth wisely advises not to hang onto this hope with bated breath.
On Your Mark, Get Set and Prep: The End of the On-Ramp and Fresh Start Program
All right, folks. With the on-ramp ride and Fresh Start program coming to a close, it’s time to straighten those ties and pull up those socks. Step Uno: Double-check your repayment plan, the bill amount, and the due date. Fire up your loan servicer’s online portal or find your servicer’s particulars via the Federal Student Aid website.
Payments giving you heartaches? Get searching for lower-cost alternatives— mostly, the good old income-driven repayment plans designed to ease your burden with payments depending on your income.
Sadly though, the online processing of IDR applications lies frozen in time. But! You can bypass this speedbump by downloading the PDF application and posting it snail mail style to your servicer. The outcome of the SAVE legal saga may tilt the scales on which plans continue to exist.
If the dreaded choice paralysis has you pinned, fret not! Shafroth recommends simply ticking the box to ask for the plan with the lowest payment. The government pops in with a handy-dandy guide to repayment plans, and the National Consumer Law Center helps sweep away the confusion with their toolkit. In short, don’t let the complex labyrinth scare you away from enrolling. Just aim for the most affordable plan. Easy-peasy, right?
Once your IDR application baton is passed on, be prepared for processing delays. During this period, a “processing forbearance” is slapped on for 60 days. While interest continues to pile on, you’re spared the penalties for missed payments. However, don’t be surprised if things don’t go as planned. Shafroth suggests shooting a spicy note or making a quick call to your servicer once you’ve sent off your IDR application. Arm them with the date you applied and ask for processing forbearance.
If you’re charging to the deadline, ring up your servicer and plead for a deferment or forbearance if you can’t whip out the dough to pay. Bear in mind, though, interest still trickles down during these pauses. Unlike with an income-driven plan, these months don’t count towards student loan forgiveness. Eye these options as mere short-term hacks until you hatch a more sustainable plan.
For those folks with loans in default, the clock is ticking to cash in on the remaining days of the Fresh Start program. This darling process lets you escape the default ravine with a quick phone call or a visit to myeddebt.ed.gov—no tedious paperwork involved.
Like the borrowers missing payments, defaulters were saved from thirsting collection vultures over the past few years. However, starting next month, the government wakes up the collection beasts to start hunting down these defaulted loans.
Well, barring a miracle or some other intervention, it’s looking like on-ramp protections are indeed coming to a close. So, buckle up, dear borrowers. The ride is going to get bumpy.