Student Loan Grace Period Ends September 30
The federal government gave student loan borrowers a reprieve during the Pandemic in 2020. Payments were paused until last September, but the government said if you weren’t able to pay your loans, it wouldn’t be reported to credit bureaus for a period of time.
Well, that “on-ramp” period is coming to a close on September 30, 2024.
So, what do you do if you still can’t pay your student loans?
Well, here are some options…
1. Switch Repayment Plans
If you're struggling to make your monthly payments, consider switching to an income-driven repayment plan. These plans adjust your monthly bill based on your income and family size, making them a more affordable option for many borrowers. This is great option if you have a large loan balance and low earnings, like a huge grad student loan.
Here’s the idea — Pay a percentage of your monthly income above a certain threshold for 20 or 25 years and you are eligible to get any remaining balance forgiven. (The SAVE plan would forgive balances after 10 years for borrowers with original loans of $12,000 or less.) For more info about the SAVE plan, I wrote about it HERE last year when it came out, although the info may not be as accurate because on studentaid.gov’s website, it now says:
A federal court issued an injunction preventing the U.S. Department of Education from implementing parts of the Saving on a Valuable Education (SAVE) Plan and other IDR plans. We are assessing the ruling and will continue to update StudentAid.gov/saveaction with more information.
You can also read more about that injunction HERE. This is unfortunate because last year, many people had their loans totally forgiven through the SAVE plan. If you qualify for the Public Service Loan Forgiveness Program, that one does not seem to be affected. By the end of 2022, 45% of Direct Loan borrowers were enrolled in an income-based repayment plan. But remember — you have to re-certify your income each year or they’re going to return you to the standard 10-year plan.
2. Get more time.
Some federal loans could be eligible for an extended repayment plan. To qualify, your student loan needs to be more than $30,000. Under the Extended Repayment Plan, if you’re eligible, you can spread out your payments over a 25 year period, compared to the Standard Repayment Plan of 10 years.
Keep in mind that although you’re lowering your monthly payments, in the long run, you’re going to pay more in interest over the 25 year period.
To see what this looks like, SoFi compared the costs of two repayment plans for paying back a typical, federal student loan after receiving a four-year degree from a private college:
Let’s say you borrowed $34,722 four years ago at an average interest rate of 3.9%.
• Under the Standard Repayment Plan, monthly payments would total $350 over a 10-year term, for a total cost of $41,988.
• Under the Extended Repayment Plan, the borrower would only have to repay $181 a month — but over a 25-year term, the total cost would be $54,409.
There is also an Extended Graduated Repayment Plan in which monthly payments start low after the borrower leaves school but then gradually increase every two years over the lifetime of the loan.
Like the Extended Repayment Plan, the loan payments are spread out over up to 25 years instead of 10. Using the above loan example, payments would start at $143 a month in the first two years after graduation and slowly increase to $251 by the end of the loan term. The total amount paid back would add up to $57,026.
Eligibility for Extended Repayment Plans
If having lower payments and knowing that you’ll pay more in interest doesn’t concern you, then the first step is to see if you qualify for the program.
The federal student loans eligible for the Extended Repayment Plan are:
• Direct Subsidized Loans
• Direct Unsubsidized Loans
• Direct PLUS Loans
• Direct Consolidation Loans
• Subsidized Federal Stafford Loans
• Unsubsidized Federal Stafford Loans
• FFEL PLUS Loans
• FFEL Consolidation Loans
Qualifying loans must have been obtained after October 7, 1998, and the outstanding loan balance must be more than $30,000 in either Direct Loans or FFEL program loans to be eligible.
Eligibility can’t be pooled across loan types, so if, for example, if you have $35,000 in Direct Loans and an additional $10,000 in FFEL program loans, the Direct Loan portion would qualify for the Extended Repayment Plan but the FFEL loan would not.
3. If you’re in default, look at the Fresh Start Program.
The Fresh Start Program gives borrowers who are in default a second chance at regaining federal aid benefits, like taking your loan out of default and making it eligible for the Income Driven Repayment plan that I mentioned above and possible loan forgiveness. It also erases the default from your credit history and makes the loan “current,” which helps to avoid wage garnishment or other federal benefit payments like Social Security and tax refunds.
Students loans that qualify include:
• All defaulted William D. Ford Federal Direct Loans and Family Federal Education Loans (FFEL) that went into default before March 13, 2020.
• Defaulted Perkins loans that are held by the Department of Education.
Defaulted loans that aren’t eligible for Fresh Start include private student loans, Perkins loans that are held by schools, Health Education Assistance Loan (HEAL) Program loans, and Direct Loans and FFEL Loans that went into default after the COVID-19 payment pause ended. Loans that are pending litigation under the Department of Justice are also not eligible for the Fresh Start Program.
Applying for the Fresh Start Program
For defaulted federal student loans that are held by a guaranty agency, you must contact the agency that holds your loans to enroll in Fresh Start. If you’re unsure which agency oversees your defaulted loan, call the Debt Resolution Group at 1 (800) 621-3115.
For defaulted loans that are held by the Department of Education, there are three ways to enroll:
• Online. Create a myeddebt.ed.gov account if you don’t already have one; otherwise, log into your myeddebt.ed.gov account. Under the Account Information page, find the Fresh Start Transfer Information section and click on the link to “enroll.”
• Phone. Call 1 (800) 621-3115 to speak to a representative with the Debt Resolution Group. When you’re asked for the reason for your call, say that you’d like to “get out of default through Fresh Start” or similar wording. You can also express your interest in enrolling in an IDR plan while making this phone call.
• Mail. Mail a request letter with your name, Social Security number, date of birth, mailing address, and the following language: “I would like to use Fresh Start to bring my loans back into good standing.” All letters must be postmarked before October 1, 2024 and mailed to: PO Box 5609, Greenville, TX 75403.
Does the Fresh Start Program Have a Deadline?
Yes. You’ll need to apply to the Fresh Start Program by the September 30, 2024 deadline. After this date, the program is closed to enrollment, and currently, there are no announced plans to extend the deadline. Don’t miss out on this one-time opportunity to get your federal student loans back into good standing.
Next Steps After the Fresh Start Program
When your loan is successfully out of default, it’s assigned to a new loan servicer. The loan’s status will show on your account as “in repayment,” and the Department of Education will request the removal of the loan’s default record from your credit report. Your new loan servicer will contact you once your loan is successfully transferred. Shortly afterward — typically within a week — you can then apply for an income-driven repayment plan to help make your payments more manageable.
Student Loan Refinancing
If you’ve exhausted all federal student aid options, there’s always the option of refinancing into a private student loan. If you qualify, you could get a lower interest rates and monthly payments. However, just know that refinancing means forfeiting benefits and protections that come with federal student loans, like the income-driven repayment.
If you need any other information or support, please reach out to me.
With Love & Gratitude,
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