Federal student loan payments are set to resume in October, but a 12-month "on-ramp" offers a safety net for borrowers who may find it challenging to make payments. While this on-ramp won't continue the interest-free pandemic payment pause, it does provide some vital benefits. In this article, we'll explore the on-ramp, its workings, benefits, and drawbacks. We'll also discuss alternative options and provide guidance for borrowers with lower credit scores.
Understanding the On-Ramp:
The student loan on-ramp is scheduled to run from October 1, 2023, to September 30, 2024, and it automatically applies to eligible borrowers. During this period, borrowers who choose not to make payments will experience the following:
Benefits of the On-Ramp:
- Student loans won't become delinquent or go into default.
- Missed payments won't be reported to credit bureaus, safeguarding your credit score.
- Debt collections agencies won't receive reports of missed payments, preventing potential garnishments or withholding of tax refunds.
- Unpaid interest won't capitalize, ensuring you won't pay interest on a larger balance once the on-ramp ends.
Drawbacks of the On-Ramp:
- Interest will accrue, increasing your overall debt.
- Missed payments will still be due once the on-ramp period concludes.
- No progress toward loan forgiveness under income-driven repayment (IDR) plans or Public Service Loan Forgiveness during this time.
Using the On-Ramp Wisely:
The on-ramp is primarily designed as a safety net for the most vulnerable borrowers. It's not a long-term repayment strategy. If you're facing financial difficulties, especially if you have other high-interest debts besides student loans, consider using the on-ramp to avoid immediate financial strain.
Recent graduates struggling to find employment or build an emergency fund may benefit from the on-ramp. However, if you can afford to make payments without jeopardizing your overall financial stability, it's advisable to start repaying your loans when they become due in October.
Explore the SAVE Repayment Plan:
An alternative to the on-ramp is the Saving on a Valuable Education (SAVE) repayment plan, designed to help borrowers with lower incomes. This plan can provide $0 monthly payments while allowing you to work toward loan forgiveness and avoiding the accumulation of unpaid interest.
Borrowers earning less than about $32,800 individually or less than $67,500 for a family of four may qualify for $0 monthly bills under SAVE. You can estimate your payments using the Federal Student Aid office's loan simulator and sign up for SAVE on Studentaid.gov. Some benefits of SAVE, such as lower payment caps and faster forgiveness for borrowers with smaller balances, will be available from July 2024.
Plan for the Unknown:
While some borrowers may be hoping for student debt cancellation, the future of these plans is uncertain. If you make payments during the on-ramp, and a cancellation plan becomes available later, it's unclear if payments will be retroactively refunded. Therefore, it's wise to make informed financial decisions based on current information.
The student loan on-ramp offers temporary relief for borrowers facing financial challenges. While it's an essential safety net, it's crucial to use it wisely and explore alternative options, such as the SAVE repayment plan. Making informed financial choices now will ensure you're prepared for whatever the future holds in terms of student loan debt.