The Department of Education announced the initial student loan repayment restart details. The Student Loan National Forbearance will end on August 31, and the first payment will begin on October 1, 2023. These new repayment dates reflect the rules under the Fiscal Responsibility Act and the current White House Announce on the Supreme Court Decision.
Based on the Proposed US Debt Ceiling Bill, we had expected Student Loan Repayment would start sooner due to the 60-day limit stated in the bill. This new announcement provides more clarity on the final rules that were signed by the White House and approved by Congress. It ends a great deal of confusion after 3.5 years of non-payment.
This timeline allows the loan servicers to react once the Supreme Court decides on the one-time student loan forgiveness. Their final decision is likely to be by June 30, 2023. Depending on that outcome, the loan balance may change, impacting the bills being sent to the student loan borrowers.
At the end of the Student Loan National Forbearance program, the government will begin charging interest on the outstanding balance starting September 1. Maintaining the National Forbearance costs an estimated $4 – 5 billion monthly.
Debt Ceiling Bill and Supreme Court’s Loan Forgiveness Decision
The new calendar allows for the Supreme Court Decision aspect of the repayment restart, which would have been an issue for the student loan servicers. This announcement provides for either outcome and minimizes borrowers’ confusion.
According to the DOE repayment rules, the loan balance adjustment will occur if the one-time loan forgiveness program is approved. Once the adjustment is applied, the borrower’s debt will be recalculated or re-amortized. It will result in a new repayment schedule, and the payment amount will change based on the new loan balance.
If this is the case, loan servicers must identify the amount approved, apply it to the correct borrower, and then communicate the new payment amount. The new timeline provides enough time for the loan servicer to process the correct bill to the borrower no matter what the decision. The monthly payment recalculation will only impact borrowers using traditional repayment methods. The one-time forgiveness recalculation issues will not affect borrowers using the Income-Driven Repayment (IDR) plans, just the outstanding balance.
If the Supreme Court denies the one-time forgiveness, repayment will remain the same as they were previously to the National Forbearance. For borrowers using the IDR methods, you need to be aware of your IDR anniversary date and your submission of income.
Student Loan Interest Rate and Debt Ceiling
The current student loan interest rates are zero under the National Student Loan Forbearance. Under the Fiscal Responsibility Act, the zero interest will end also. As a result, federal student loans will return to their pre-COVID rates unless the borrower did a consolidation during the National Forbearance period. These interest rates are the same as the loans were before COVID.
You can contact your loan servicers to clarify your student debt interest rates. However, the restart may overwhelm the loan servicers, and wait times could be very long. You can also use the Studentaid.gov website to review your loans and current interest rates. The borrower will need their FSA ID and password to access DOE systems. Older borrowers may need an FSA ID and can quickly establish one on the StudentAid.gov website.
Revisit Your Student Loan Repayment Plan and Advice Sources
Now that we have a defined calendar, borrowers can plan appropriately for their repayment restart. Some may have had income or marital status changes that could impact their numbers. Another large group of borrowers who graduated during the National Forbearance have never been in the system or made payments. This time before repayment starts is excellent for getting the information you need to make the right decision.
Prior to COVID, we saw repayment trends that were changing. We have seen a significant increase in the usage of Income-Driven Repayment (IDR) methods. This trend will continue due to new legislation and the growing debt more borrowers are facing. It also causes another problem for borrowers since it adds another level of complexity that traditional loans do not have.
Many borrowers expect the loan servicers to help with all their repayment advice. Since IDR methods require the borrower to know how to manage the Adjusted Gross Income (AGI), the loan servicers or colleges cannot legally provide any personal finance or tax insights. Getting the proper advice for IDR methods will become more difficult for borrowers.
Like your taxes, more borrowers must depend on financial planners and tax professionals for the correct advice. Starting mid-2023, the IRS data will populate many Department of Education systems like student loan repayment. A simple adjustment could save a borrower thousands of dollars a year. Getting advice from trained professionals will be an essential step in the restart.
Updating Your Student Loan Contact Information with Tax Address
Borrowers last made student loan repayment over three years ago. Therefore, we recommend that borrowers verify and update their contact information in two areas. These would be with your loan servicer’s information and on the StudentAid.gov website.
Starting mid-2023, the DOE will begin integrating system information with the IRS system. This data integration will impact both loan borrowers and FAFSA filers. We recommend that the borrower use the contact information in the address section of your most recent 1040 tax return. It should match it exactly. What is meant by exactly is if your address uses an abbreviation, then use that abbreviation in your student loan contact information.
If your current contact information is different than your recent tax return, do not worry about it. Instead, use your most current information. Under the DOE system upgrade, double authentication for system access is part of the process. An email address or cell phone number will be required.
Alternative Extension Option Possible
According to various sources, before the Debt Ceiling Proposal, the White House and DOE considered alternative restart options for some borrowers. The bill does not allow any further extension of the National Forbearance. The Department of Education could promote the use of forbearance to extend the non-payment period for some borrowers who need additional time.
Borrowers must realize that the lack of payment under forbearance will add the unpaid amount to their loan balance. We recommend this option for a minimal number of borrowers under extreme situations. Interest rates will no longer be zero after August 31, 2023.
If a borrower is under financial stress, they should investigate one of the IDR methods. The IDR repayment decision may still increase the balance but only part of the amount, unlike the entire amount under forbearance.
New 5% Income-Driven Repayment Method Is at Risk
Not stated directly, but another rule within the Fiscal Responsibility Act is the possible elimination of the new 5% IDR method. An independent study noted that this method could cost up to $600 billion over the next ten years.
The new Debt Ceiling Proposal limits spending increases to 1% unless it has a cost reduction offset. With this clause, the 5% IDR methods will unlikely meet these new guidelines. It could also be linked to the Supreme Court decision on a Constitutional basis.
Student Loan Repayment Restart Summary
Now that the Fiscal Responsibility Act is law, we are starting to see the details and the impact on student loan repayment. We still need to wait for the Supreme Court decision for final numbers, but at least borrowers knowing when repayment will start is a help. It gives borrowers time to reexamine their student loan repayment plan and question the best options.
PayForED has software, advisors, and training programs to help borrowers and advisors get ready for the student loan repayment restart. Due to the increased complexities and the new IRS data integration, loan servicers cannot legally provide all the options borrowers need. Depending on your situation, this could be an excellent time to get a trusted second opinion.
