Student loan interest resumes as payment pause nears its end
MINNEAPOLIS -- After a three-year pandemic pause, student loan bills are coming due again. Interest on balances began accruing Friday with payments restarting on Oct. 1.
More than 45 million Americans have $1.7 trillion in student debt. That includes more than 800,000 Minnesotans, according to the state Office of Higher Education. The federal government stopped collecting those debts at the dawn of the pandemic when COVID-19 rocked the economy and left many out of work.
President Joe Biden then tried to forgive up to $20,000 in debt for eligible borrowers, but that plan was blocked by the U.S. Supreme Court this summer. A deal to raise the debt ceiling brokered with House Republicans included provisions to end the pandemic student loan forbearance period, and it prohibits the education secretary from extending that pause without approval by Congress.
New income-drive repayment plan
Now the Biden Administration has a new income-based repayment program, dubbed the SAVE Plan, that the White House estimates will impact 20 million lower-income borrowers. Who qualifies depends on how much money they make and their family size.
If borrowers do meet the threshold, they will only have to pay 5% of their income discretionary income in a monthly payment, according to the Department of Education.
The plan also eliminates any remaining interest that monthly payment doesn't cover. Federal officials provide this example: If a person's payment is $30, and the interest accrued for that month was $50, the borrower would not be on the hook for the $20 difference.
For some Americans, this will mean monthly payments of $0, the White House said.
This takes effect in July 2024.
"On ramp" transition period until next fall
Missing or having a late payment won't be reported to credit reporting agencies through next September because of an "on ramp" transition designed to help borrowers transition back to making payments.
But interest will still add up during that time.
Loans will not be sent to collections until September 30, the department officials said. This does not apply to private loans.
Other loan forgiveness and ways to save
Enrolling in automatic payments directly debited to your bank account will reduce interest rates by 0.25%. Some professions considered a public service like teachers, nurses and government employees, may be eligible for some forgiveness.
In some cases, student debt will be discharged if a person declares bankruptcy or has served in the Peace Corps.
Evan, who preferred to only give his first name, is 25 and visited Minneapolis from Rochester, New York, on Friday. He said the payment pause helped him save up money to begin his life after college.
Going forward, he plans on targeting his high-interest loans first. His total debt is $27,000.
"I want to do it in a way where I save as much money as possible so I can invest in other things in my life," he said in an interview with WCCO.
Minneapolis resident Julissa Gilbertson, 23, also said loan forbearance enabled her to save money, so repayment won't impact her daily life too much. She plans to pay a good chunk of her remaining $14,000 soon and then do monthly payments for the rest of it.
Still, she and Evan are both adjusting to the change. Both had hoped some of their debt would be forgiven.
"It's important that we keep fighting for student debt relief because it has such an impact on so many people and that would really improve the lives of a lot of people," Gilbertson said.