What to Know Now About Student Loan Debt and Repayments

This month, payments on student loan debt for millions of borrowers across the country restarted after the three-year pandemic pause. California has some of the lowest tuition rates in the nation, but the state’s residents carry higher than average student debt balances, risky graduate school debt, and a unique reliance on parent-held debt, according to a recently released report from The Century Foundation.

Here’s what borrowers need to know if they already have student loans:

When do repayments restart?

The pandemic-era pause on federal student loan payments has ended. Repayment for most borrowers resumed Oct. 1. Interest has already restarted accruing, as of September. However, if you’re currently enrolled in school or recently graduated, then for most federal student loan types, you have a six- to nine-month grace period from the moment you graduate, leave school or drop below half-time enrollment. And for most loans, interest accrues during your grace period.

The U.S. Department of Education is giving borrowers a one-year “on-ramp” to repayment through Sept. 30, 2024, which prevents people from falling into delinquency or default if they miss payments. Interest will still accrue, but any missed payments won’t lead to negative credit reporting.

What repayment plans are available?

• Standard: Payments are a fixed amount that ensures your loans are paid off within 10 years, or 10 to 30 for consolidated loans.
• Graduated: Payments are lower at first and then increase, usually every two years, and are for an amount that will ensure loans are paid off within 10 years or 10 to 30 years for consolidated loans.
• Extended: Borrower must have more than $30,000 in outstanding direct loans. Payments are fixed or graduated and will ensure loans are paid off within 25 years.
• Saving on a Valuable Education (SAVE) Plan, formerly the REPAYE plan 
  • Monthly payments will be 10% of discretionary income, which the department defines as the difference between annual income and a percentage of the poverty guideline for a borrower’s family size and state of residence.
  • Payments are recalculated each year based on updated income and family size.
  • Spousal income or debt is considered if the borrower files a joint tax return.
  • Any outstanding balance is forgiven if the loan isn’t repaid after 20 years for undergraduate study or 25 years for graduate or professional study.
• Pay-as-you-earn repayment plan (PAYE) 
  • Must be a new borrower on or after Oct. 1, 2007, or received a loan on or after Oct. 1, 2011.
  • Monthly payments will be 10% of discretionary income but never more than what you could pay under the 10-year standard repayment plan.
  • Payments are recalculated each year based on updated income and family size.
• Income-based repayment plan (IBR)
  • Must have high debt relative to income.
  • Monthly payments will be either 10% or 15% of discretionary income, but never more than what you could pay under the 10-year standard repayment plan.
  • Payments are recalculated each year based on updated income and family size.
  • Spousal income or debt is considered if the borrower files joint tax returns.
  • Any outstanding balance.
• Income-contingent Repayment Plan: Monthly payments are the lesser of what you would pay on a repayment plan with a fixed monthly payment over 12 years and adjusted based on income, or 20% of your discretionary income, divided by 12. Parent PLUS borrowers are eligible if they consolidate the debt into a direct loan.

What about my interest rate?

Interest rates remain unchanged from what borrowers had before the pandemic pause. However, you may see a different rate if you enter a new repayment plan or consolidate your loans.

Interest rates are set by the Department of Education and tied to the 10-year Treasury note. Federal student loans borrowed after 2006 have fixed rates.

Why does the government charge interest on student loans?

“One argument would be we want people to have the incentive to pay back the loans, hence their interest rates,” said Peter Granville, a fellow at The Century Foundation studying federal and state policy efforts to improve college affordability. Other arguments include appealing to Congress to get rid of interest rates, or moving to debt-free college altogether, he said.

“Having debt is an emotionally weighty circumstance to be in, and nobody wants to take on debt, but we do it to finance the education that people need,” Granville said.

Does the federal government make money off student loans?

It’s unclear. Last year, a report from the U.S. Government Accountability Office found the Department of Education miscalculated the cost of the federal student loan program. The department initially estimated that it would generate $114 billion from federal direct student loans; however, the GAO discovered that as of 2021, the program cost the government $197 billion. Part of the shortfall is due to the cost of the three-year pandemic pause, but most of it is because the department failed to consider the percentage of borrowers who would choose to enroll in income-driven repayment plans, the GAO concluded.

The GAO further explained it’s difficult to estimate future costs because borrowers’ incomes, family sizes and payment decisions change over time. It’s also difficult to examine past costs because there is a lack of historical data when new changes are introduced to student loan programs.

The Congressional Budget Office in 2022 projected (PDF) that the only loan program the government would see revenue from is the Parent PLUS program. The government loses money or subsidizes undergraduates, graduates and Grad PLUS loans.

Tiara Moultrie, a fellow at The Century Foundation focusing on higher education accountability, said there is concern among those analyzing student loans that the government will lose more money on student loans as more people enroll in income-driven repayment plans like the new SAVE plan. The CBO estimates (PDF) that by 2027, the total percentage of borrowers in an income-driven plan will increase by about 12% annually. Typically, for every $1 invested in an income-driven covered loan, the government loses 17 cents.

Currently, out of 43.4 million borrowers, 8.5 million are in an income-driven repayment plan.

What if I have trouble repaying my loan?

Contact your loan servicer to discuss options. You may choose to change repayment plans to lower monthly costs, request deferments, or enter forbearance, which allows you to stop making payments temporarily.

What is the department’s relationship to loan servicers?

Loan servicers like MOHELA, Nelnet, EdFinancial and ECSI are private contractors hired by the department to service loans. They are assigned to handle billing, and payment plans, and advise and assist borrowers with their student loans at no cost to borrowers.

Your servicer may have changed during the pandemic from one company to another because their contract with the department wasn’t renewed, or a new servicer was awarded a contract. These contracts typically last five years until renewal or cancellation. Sometimes a change happens when a borrower enters a new repayment or forgiveness program — for example, only one servicer handles Public Service Loan Forgiveness.

The servicers should notify borrowers if there is a change.

Can I discharge my loans in bankruptcy?

Yes, but it depends on the terms of the bankruptcy court’s decision. Those terms may include full discharge, partial discharge, or full repayment but with different terms like a lower interest rate.

How can I get my student loan forgiven, canceled or discharged?

There are a variety of ways to get a federal student loan canceled. For example, teachers are eligible for up to $17,500 in forgiveness through the Teacher Loan Forgiveness program. Government employees, nurses, police officers, nonprofit workers and other people who work in public service may qualify for the Public Service Loan Forgiveness program. For those with a disability, there is the Total and Permanent Disability Discharge program. Finally, borrowers who participate in income-driven repayment plans are eligible for loan forgiveness if they’ve been in repayment for 20 or 25 years.

Loans are also discharged or forgiven if your college or school closed while you were enrolled or shortly after you withdrew, or, if your college misled you or engaged in some other misconduct. Such forgiveness plans are known as closed-school discharge and borrower defense.

On Wednesday, President Joe Biden announced $9 billion more in student debt relief for borrowers under Public Service Loan Forgiveness, disability forgiveness, and other income-driven repayment plans.

What happens to my loans if I die?

Loans will be discharged after the required proof of death is submitted.

What happens to my parent’s PLUS loan if my parent dies, or if I die?

The loan will be discharged if your parent dies or you, the student, dies.

For students applying for loans:

How do I apply for student loans?

You may be offered student loans as part of your college’s financial aid offer. Loans can come from a variety of sources, such as private banks, organizations and the federal government.

What types of federal student loans exist?

Undergraduate students who demonstrate financial need can receive Direct Subsidized Loans. Direct Unsubsidized Loans do not require students to demonstrate need. They are available to eligible undergraduate, graduate and professional students.

Complete the Free Application for Federal Student Aid. Your college will tell you how to accept all or part of the loan offered. However, before receiving money you are required to enter loan entrance counseling and sign a Master Promissory Note.

There are also Direct PLUS Loans:

• Grad PLUS loans are given to graduate or professional students to help cover expenses. Borrowers do not need to demonstrate financial need, but they are subject to a credit check. People with poor credit histories must meet additional requirements.
• Parent PLUS loans are given to parents of dependent undergraduate students to cover expenses. Borrowers do not need to demonstrate financial need, but they are subject to a credit check. People with poor credit histories must meet additional requirements.

How much can I borrow?

Undergraduate students can receive direct subsidized and unsubsidized loans from $5,500 to $12,500 per year, depending on the year they are in school and their dependency status.

Graduate and professional students can borrow up to $20,500 each year for unsubsidized loans. PLUS loans are uncapped and determined by the student’s school to cover any expenses not covered by other financial aid.

This report originally appeared in EdSource.