Prepare for the End of Student Loan Freeze

Student Loan Freeze Ends: As the three-year freeze on student-loan payments and interest draws to a close, millions of borrowers must now make adjustments to their budgets to accommodate monthly student-loan bills starting August 30th.

Borrowers experienced a unique respite as the pause on payments and interest, which was initiated in response to the coronavirus pandemic in March 2020, was repeatedly extended over the past three years.

However, due to a provision in the debt-ceiling deal recently reached with House Speaker Kevin McCarthy and passed by the House, President Biden will not be able to extend the freeze any further.

While some borrowers may be hopeful for loan forgiveness, the fate of the Biden administration’s plan to eliminate up to $20,000 in federal student-loan debt for eligible borrowers remains uncertain pending a Supreme Court ruling expected later this summer.

For now, the payment pause remains in effect through the summer, but financial advisers urge borrowers to take proactive measures such as contacting their loan servicers and carefully examining their cash flow. Taking action now can help individuals better absorb the impact on their budgets.

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To prepare for the resumption of payments, borrowers should confirm the details of their monthly payments by contacting their loan servicers. This will enable them to calculate the necessary adjustments to their budget in order to accommodate the recurring bill effectively.

Scott Buchanan, Executive Director of the Student Loan Servicing Alliance, advises borrowers to start incorporating the payment into their budget immediately. By doing so, the transition in September will not come as a shock.

To ensure financial readiness, it is crucial for borrowers to establish an existing budget or gain a clear understanding of their current cash flow. Sarah Behr, a financial adviser and founder of Simplify Financial Planning, emphasizes the importance of this understanding in making informed decisions regarding potential sacrifices that may be necessary to meet payment obligations.

While borrowers await the Supreme Court decision, it is unwise to solely rely on loan forgiveness. Buchanan cautions borrowers not to make any significant changes to federal student-loan debt until eligibility for forgiveness is confirmed. For those who fall outside the forgiveness qualifications, refinancing to a lower rate may be a viable option to manage the loan obligation more sustainably.

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Under the debt-ceiling deal, federal student-loan payments will resume according to the regular schedule starting August 30th. It is advisable for borrowers to review their payment history by logging into their student-loan accounts and reach out to their servicers with any questions.

In case of changed financial circumstances since 2020, borrowers should explore alternative repayment plan options. The Biden administration introduced changes to income-driven repayment plans in January, which can lower monthly payments and expedite the repayment process. By contacting their servicers and utilizing the Education Department’s loan simulator tool, borrowers can assess different repayment options based on their income, family size, and outstanding debt.

As the student-loan payment freeze concludes, proactive steps taken by borrowers now can alleviate the impact on their financial situation and ensure a smoother transition back to regular payments.