Extra Credit: Biden administration confirms it’s time to start repaying student loans in February. What you need to know

If you’re experiencing deja vu, you’re likely not alone. The freeze was scheduled to end multiple times over the last 21 months and each time, officials extended it. This week advocates are renewing calls on the Biden administration for mass student debt cancellation and pairing that with a request to continue to hold off on resuming the payments, using the pause as a “stopgap” until the debt is canceled. Senate Majority Leader Chuck Schumer also called on the Biden administration to keep the freeze in place.  

“With the advent of omicron, the continuation of COVID, students should not have this burden placed on their shoulders,” he said. 

Still, borrowers may want to start preparing for payments to resume; policymakers have said on several occasions that this will be the “final extension” of the pause. In December, White House Press Secretary Jen Psaki confirmed that the payment freeze would expire on February 1, noting that “a smooth transition back into repayment is a high priority for the administration.”

We’ll have tips for how to get as ready as you can to pay that first bill at the end of this piece, but first we’ll dig into some of the issues that could complicate the transition to repayment and that advocates, borrowers and regulators will likely be watching closely. 

How will the end of the student loan payment pause affect your life and finances? We want to hear from you: email jberman@marketwatch.com. 

The economy: 

Though the economy and labor market are certainly in a much better position than at the start of the pandemic when the payment pause was first implemented — or even at other times when officials extended the freeze — some Americans are still struggling. 

Exacerbating those challenges, much of the other pandemic relief, like enhanced unemployment benefits and the eviction moratorium, have already disappeared or are scheduled to end soon. In addition, the new omicron variant and the possibility of a winter COVID surge could complicate the economic recovery. 

“There are lots of people that are just not well served by the current economy,” said Mike Pierce, the executive director of the Student Borrower Protection Center, a borrower advocacy group. Specifically, Pierce pointed to the elevated unemployment rate among Black workers, which was 6.7% in November, compared to the 4.2% unemployment rate overall. 

“You’re adding insult to injury here by restarting student loan payments and you’re going to widen disparities as a result,” Pierce said. “It’s hard to imagine building back better and at the same time sucking billions of dollars out of the pockets of the people that you expect to be driving this new economic resurgence.” 

Even borrowers who have jobs are worried about how their student loan payments will fit into their monthly budget. Nearly 90% of fully-employed student loan borrowers said they weren’t financially ready to resume payments on February 1 in a survey of more than 33,000 borrowers conducted by The Student Debt Crisis Center, an advocacy group, and Savi, a company that helps borrowers manage their student loans. 

For some, the payment pause provided an opportunity to focus on other financial priorities, like paying down other debt or saving. Advocates worry that resuming student loan payments will put that progress towards financial stability in jeopardy. Roughly 87% of respondents to the survey said the payment pause made it possible for them to afford other bills. 

“This has really unleashed people’s potential to participate in the economy, support their families and do things that we all recognize are really important,” said Cody Hounanian, executive director, Student Debt Crisis Center. 

The student loan system: 

This period marks the first time the government has ever shut the entire student loan system off and turned it back on. Evidence indicates that during previous more targeted student loan payment pauses — for example, to help borrowers cope with the impact of a natural disaster — borrowers have slipped into default due to poor communication about the resumption of payments. 

That dynamic has had stakeholders concerned about how prepared the Department of Education and the companies it hires to work with student loan borrowers are to restart the system and protect borrowers from slipping into delinquency and default. 

Democratic Senators Elizabeth Warren, Chris Van Hollen, Richard Blumenthal and Tina Smith wrote to some student loan servicers this month asking them for information about how they plan to support borrowers resuming payments. “This simultaneous restart of 32 million borrowers’ loans, half of whom will also be transferring to a new loan servicer, marks an unprecedented event with a heightened risk of borrower harm,” the Senators wrote. 

Student loan servicers feel more prepared now for payments to resume than they did the last several times the threat of payments loomed, said Scott Buchanan, the executive director of the Student Loan Servicing Alliance, a trade group. 

“Previously we would be 45 days away from a resumption date and had zero guidance about how to do it,” Buchanan said. “That is not the case now.  We have roughly the guidance that we’re going to need to do this.”  

Roughly 57% of borrowers in the Student Debt Crisis and Savi survey, which was conducted in early November, said they already heard from their servicer about payments resuming. About one-third heard about the end of the payment pause from the Department of Education directly. 

Restarting student loan payments for millions of borrowers would be a dramatic undertaking on its own, but it comes at a time when the student loan system is undergoing other, major changes. Multiple contractors have said they plan to stop servicing student loans, which means millions of borrowers’ accounts are shifting to a new firm. 

“There have been times in the past, as I understand it, that [the Office of Federal Student Aid] hasn’t always handled transfer of accounts well and the servicers haven’t transferred the accounts well and there have been problems for borrowers,” Richard Cordray, the chief operating officer of Federal Student Aid told lawmakers in October. 

This time around, Cordray, the former director of the Consumer Financial Protection Bureau, said, they’re starting by moving small groups of borrowers over at a time to work out the kinks and then increasing the number of borrowers who are transferred. Regulators, including some at the state level, and the CFPB, are also watching the servicer transfer closely, Cordray said. 

“That gives me more confidence,” he said. 

Throughout the Biden administration, advocates have called on officials to fix outstanding issues with the student loan program before throwing borrowers back into repayment. In the past few months, officials have started to deliver on one of those requests by vowing to revamp the program that provides loan forgiveness to public servants with at least 10 years of service, after years of complaints from borrowers — presenting another operational challenge for the student loan system as payments resume. 

Defaulted borrowers: 

Borrowers who have defaulted on their student loans are one of the groups at risk of facing the most harm when payments and collections resume. These borrowers can have their wages, tax refunds — including the child tax credit, advocates warn — and Social Security benefits garnished over the debt. 

“What is concerning is that if payments turn back on and collections turn back on early next year, folks in default — right as they’re filing their 2021 taxes — will be in a position to have their tax refunds garnished and their benefits garnished,” said Sarah Sattelmeyer, project director, education, opportunity and mobility, at New America, a think tank. “This money is a lifeline for many folks.” 

Politico reported in October that officials were considering moving borrowers out of default when payments and collections resume, essentially wiping their slate clean. But officials haven’t made any formal announcements indicating they will adopt this policy. 

“It is understood that delinquent borrowers will be returned to current status and we’ll move forward to try to put them in the right position to succeed during repayment,” Cordray told lawmakers in October. “As for defaulted borrowers, those are matters that are under consideration right now.” 

Regardless of these concerns, payments, interest and collections are very likely to resume starting on February 1. As that date approaches, here are some tips on how to prepare. 

Make sure your contact information is up to date: 

Many borrowers may have moved during the pandemic or if they graduated from school will be entering into repayment for the first time when the pause lifts. To ensure they receive accurate and timely information about the end of the payment freeze, borrowers should make sure their address, phone number, email address and other details are up to date with their servicer, said Betsy Mayotte, the president of the Institute of Student Loan Advisors. 

“That’s how they’re going to know when their actual first payment is due,” she said. Though borrowers won’t be required to make any payments before February 1, 2022, actual payment dates will vary depending on the billing cycle. 

If you’re not sure who your servicer is, Mayotte advises logging on to studentaid.gov to find out who is servicing your loans. While you’re there, it also makes sense to update your contact information with the Department of Education’s Office of Federal Student Aid. 

The agency is also reaching out directly to borrowers through text messages, phone calls, emails and other means, a Department official told financial aid professionals during a November training conference. 

Find out how much you’ll owe each month: 

It’s been so long since borrowers have been making payments that it makes sense that some might forget how much they’re expected to pay each month. In addition, some borrowers who left school during the pandemic will be repaying their student loans for the first time when the payment pause lifts. 

That’s why Mayotte suggests borrowers find out how much their payments are going to be. The easiest way to do that is to contact your student loan servicer. If your circumstances have changed since the last time you were repaying your student loans or the payment doesn’t look affordable to you, you should figure out if another payment plan makes more sense, Mayotte said. 

To do that borrowers can go to studentaid.gov and use the loan simulator, which is a calculator that allows you to see how different payment plans will impact your monthly bill.

“How much you’ll end up paying over time under each plan, that’s another important number for borrowers to look at,” Mayotte said. Smaller monthly payments could stretch the loan repayment term, putting borrowers at risk of paying more over the lifetime of the loan. 

If you’re payment isn’t affordable, start the process of moving to a new payment plan: 

“The good news, to the extent that there is any, is that you do still have the right to make payments as a percentage of your income,” said the SBPC’s Pierce. “You have this right to pay nothing at all on your student loans and that’s not going anywhere.” 

Indeed, through income-driven repayment, the suite of payment plans that allow federal student loan borrowers to make payments tied to income, borrowers who earn 150% (or less) of the poverty line for their family size and state can stay current on their debt with monthly bills as low as $ 0. Borrowers whose employment situation has changed during COVID should be looking particularly closely at this option. 

“The best advice that we have is the same advice we’ve always had,” Pierce said. “Call your student loan company, demand a payment that you can afford and if something doesn’t feel right submit a complaint,” to the Consumer Financial Protection Bureau or Federal Student Aid’s student loan ombudsman. 

Typically borrowers need to fill out paperwork to certify their income as part of the process of applying for an income-driven repayment plan, but the Department of Education is providing a short-term option for borrowers to report their own income so they can get into an affordable repayment plan “at this critical time,” an agency spokesperson wrote in an email. That could speed up the process for some borrowers, but they will have to provide documentation of their income at some point down the road, the spokesperson said.

The Department recommends that when possible, borrowers use the IRS data retrieval tool, which sucks tax information into an income-driven repayment application, when applying for one of these plans.

Borrowers who were using an income-driven plan before the pandemic may want to re-certify their income, particularly if their income dropped during the past several months, said Persis Yu, policy director and managing counsel at SBPC. 

It probably makes sense to start this process as soon as possible because once bills come due, servicers may face a crush of calls from borrowers trying to adjust their payments. Like many employers, student loan servicers are facing competition for workers in the tight labor market, which exacerbate these challenges, Buchanan said. 

“We’re going to hire as many as we can under the economics of the program that the marketplace will allow,” he said. “No matter what our staffing situation is, if 30 million people call us on one day that’s going to be a challenge.” 

If you want to have your payments auto-debited from your bank account, make sure you’ve confirmed that decision with your student loan servicer: 

Borrowers who signed up for auto-debit before the payment pause went into effect won’t be automatically enrolled in the auto-debit — which provides a 0.25 basis point discount and eliminates the chore of remembering to make a payment — when the system gets turned back on. 

Servicers will be contacting or have already contacted borrowers to confirm whether they want to stay in auto-debit, according to the Department of Education’s website. If you want your payments to be auto-debited from your account when the pause ends you should respond to these communications.  

The decision of whether to re-enroll borrowers into auto-debit by default, included tricky tradeoffs. Some lawmakers expressed concern that not automatically re-enrolling borrowers could lead some to fall into delinquency. Still, it’s likely at least some borrowers who would prefer not to be in auto-debit would stick with it if the agency placed them there automatically. 

“If you make something the default a lot more people choose it at least in the short-term and the short-term can be many years,” said Mark Dean, an associate professor of economics at Columbia University.  

For some of those borrowers, re-enrolling in auto debit could be the right choice. It would ensure that they make a student loan payment when they might have otherwise forgotten. This might be helpful given how much time has elapsed since borrowers last paid a student loan bill and that the last time they paid, the funds were taken from their bank account automatically. 

But for some of those borrowers, particularly those whose economic situation has changed during the pandemic, defaulting to auto-debit could put them in financial jeopardy. 

“You put them into autopay, maybe this means that you don’t pay your rent and you don’t eat that week,” Dean said. In other words, the costs of officials choosing the wrong default option are likely bigger for those people who shouldn’t be using auto-debit than for those who should be using it, he said. 

“If you were going to ask me to vote for a policy,” Dean said, he’d vote for “don’t put them on automatically.” 

That dynamic is at the heart of a “cutting edge question” in the field of behavioral economics, which has gained attention and popularity in recent years as a tool for policymakers, educators and companies to nudge consumers towards certain financial decisions. 

“For a long time people have focused on the average effects of these policies,” Dean said. “What people are realizing is they have very heterogeneous effects on different people.” 

If you have a cushion and want to make a big payment: 

For some borrowers, a break from student loan payments allowed for an opportunity to save and they may be looking to use those funds to pay off a big chunk of their debt before payments resume. 

If that’s you, the Institute of Student Loan Advisors’ Mayotte suggests making the lump sum payment before the payment freeze ends. As part of the pause, federal student loans are accruing interest at 0% — a great opportunity to knock out some of the principal before interest goes back to its pre-pandemic rate. 

If the money you plan to put towards the loan is invested elsewhere, you probably want to wait until January to make a loan payment, to give those funds as much time as possible to build, she said. 

There are two general approaches to lump sum debt payments that borrowers could choose from. One is the avalanche method where you target the loan with the highest interest rate, that will likely save you the most money over time. The other is the snowball method, where you focus on knocking out loans with the smallest balance, which can provide a psychological boost as you stare down your loan balance. 

Regardless of which method you choose, make sure your servicer knows where you want to direct the payment. Some servicers’ online portal will allow you to designate the loan where you want to apply the funds when you make the payment. If yours doesn’t, you either want to send them an email or speak with someone on the phone to make sure your payment is going to the right loan, Mayotte said. 

Factoring forgiveness into your plans: 

Though there are constant headlines surrounding the possibility of widespread loan forgiveness, experts — even those who support the policy — say you shouldn’t factor it into your financial plans. 

“Prepare for the worst,” said the SPBC’s Yu, adding that there is a need for widespread debt cancellation because borrowers can’t afford payments. “I would not make personal decisions based on things that are in the political atmosphere.”