After a pause of more than three years, interest on federal student loans resumes Friday and, in October, more than 43 million Americans will need to start making payments again.
While the Biden administration has proposed a new student debt relief program, it could be months, or even years before it's finalized.
Many borrowers will face "payment shock" as they have to budget for this substantial new expense. Nearly half say they aren't ready to start paying down their education debt again, according to a July survey from U.S. News & World Report.
But with some understanding and preparation, you can face the end of the student loan forbearance with confidence.
For more on student loans, find out what the experts say about getting ready for the end of the payment pause.
When does interest resume on student loans?
Interest on federal student loans was paused at the beginning of the COVID-19 pandemic in March 2020. As part of the debt ceiling deal passed in June, the White House agreed to end the forbearance and bar any further pauses without congressional approval.
The Department of Education then announced interest would resume on Sept. 1, 2023.
How does interest accrue on student loans?
There are two basic kinds of federal student loans.
Direct subsidized loans are available for undergraduate students and are based on a borrower's financial need. These loans don't accrue interest while you're in college, during the six-month grace period after you leave school or if you are in deferment due to unemployment or economic hardship.
In these instances, the Education Department pays the interest.
Direct unsubsidized loans are available for graduate and undergraduate education and are not based on financial need, Interest on these loans, however. begins accruing immediately after disbursal.
While interest has been paused on direct unsubsidized loans since March 2020, it typically generates even when you're not required to make payments -- such as while you are in school, in deferment or in forbearance.
In some instances, unpaid interest on a direct unsubsidized loan is capitalized, which means it's added to your principal balance. Future interest is then calculated off that new, higher total.
Borrowers can have both subsidized and unsubsidized student loans, with different borrowing limits and interest rates.
When do I need to start making payments on my student loans again?
Payments will be due in October, according to the Education Department website.
Exactly when in October depends on which loan servicer is handling your account, CNN reported. The Education Department said borrowers will be notified about details "well before payments restart."
Read on: Find Out Who Your Student Loan Servicer Is
Which student loans are paused?
The moratorium on payments and interest included all federally held student loans, regardless of what company is servicing the loan. Eligible student loans include:
- Direct federal student loans.
- Federal Family Education Loan program loans held by the Department of Education, aka FFEL.
- Federal Perkins Loans held by the Department of Education.
- Defaulted FFEL loans not held by the Department of Education.
- Defaulted Health Education Assistance loans, aka HEAL.
Student loans that are not eligible include:
- Nondefaulted FFEL loans not held by the Department of Education.
- Federal Perkins Loans that are not held by the Department of Education.
- Nondefaulted HEAL loans.
- Private student loans.
How can I prepare for making student loan payments again?
The Consumer Financial Protection Bureau estimates that one in five student loan borrowers will struggle to make payments once the pause ends. While more borrowers will be eligible for President Joe Biden's new income-driven repayment plan, others with higher incomes will face a significant new budget item every month.
Here's how to prepare for student loan payments to resume.
1. Contact your student loan servicer. If you moved or changed financial institutions, it's important to provide current information. Even if you didn't, you may need to reestablish automatic payments.
During the pandemic, some companies exited the student loan business, so a different one may be managing your account.
You can locate your loan servicer on the Department of Education's Student Aid website.
2. Consider an income-driven repayment plan. Due to the extended pause, you may not have been budgeting for student loan payments over the past three years. You might have new expenses, a lower-paying job or any other number of variables.
If you don't think you'll be able to make your new monthly student loan payments, look into an IDR plan. These plans make monthly payments more manageable and prevent borrowers from missing payments or defaulting, but they also extend student loans, making them take longer to pay off. The main IDR plans are:
- SAVE (saving on a valuable education) plan (formerly called REPAYE)
- PAYE (pay as you earn) plan
- IBR (income-based repayment) plan
- ICR (income-contingent repayment) plan
The new SAVE plan was announced by Biden immediately after the Supreme Court issued its ruling invalidating his student loan debt relief plan. It will cap monthly payments at 5% of discretionary income, down from 10% under REPAYE. At a press briefing, Secretary of Education Miguel Cardona said that borrowers earning less than $33,000 will have their monthly payments reduced to $0.
Some elements of the SAVE plan are in effect now, while others won't take effect until July 2024. On July 31, 2023, the Department of Education launched a beta application for the new SAVE plan. In the announcement of its beta app, the Education Department promised that applications submitted in summer 2023 will be processed "in time for your first payment due date" in October.
3. Find out your new monthly payment. If you're on a traditional repayment plan, your loan servicer may recalculate your monthly payment based on your current balance and the remaining repayment schedule, the StateAdvance reported. You can check the Student Aid website for updates on resuming payments.
If you're on an IDR plan already, payments will typically return to what they were before the pause, unless you've switched plans or recertified.