Key Changes in Student Loan Benefits: What Borrowers Need to Know

As of Monday, a critical grace period for student loan borrowers will come to an end, marking a significant shift for those navigating repayment. This one-year “on-ramp” period, implemented by the Biden administration during the pandemic, offered a safety net for borrowers who missed payments without suffering immediate penalties to their credit scores.

After a pause of over three years, student loan payments resumed last year. During this on-ramp phase, which extends until September 30, 2024, student loan servicers refrained from reporting missed, late, or partial payments to the three major credit bureaus. Data from TransUnion reveals that more than half of eligible borrowers took advantage of this grace period, suggesting many were still adjusting to the resumption of payments.

However, the conclusion of this grace period coincides with uncertainty surrounding the SAVE (Saving on a Valuable Education) repayment plan. Introduced last year, the SAVE plan aims to reduce monthly payments for borrowers, but its implementation is currently stalled due to ongoing litigation. A pivotal hearing is set for October 15 at the 8th U.S. Circuit Court of Appeals.

While the SAVE plan remains blocked, borrowers enrolled in it are not required to make monthly payments. If the court rules against the SAVE plan, these borrowers may face larger payments when it is eventually reinstated.

In light of the upcoming end of the grace period, many advocacy groups have urged the Department of Education to extend the on-ramp benefits. However, the department has indicated to CNN that there are no plans to prolong this period, leaving borrowers to face potential repercussions for missed payments.

Consequences of Missing Payments

With the end of the grace period, the consequences of missed payments will revert to pre-pandemic conditions. Loan servicers will begin reporting any missed payments to credit bureaus after 90 days past the due date. If a borrower defaults—defined as failing to make a payment for at least 270 days—there can be serious financial implications.

Defaulting on a loan can severely damage a borrower’s credit score, hindering their ability to secure loans for cars, homes, or other purchases. Recovering from a default can take years and may involve withholding of federal tax refunds or portions of paychecks. Furthermore, once in default, borrowers lose access to deferment or forbearance options and are ineligible for additional federal student aid. The loan holder also gains the right to take legal action.

The Biden Administration’s Student Loan Relief Efforts

The Biden administration has faced significant challenges regarding its student loan relief initiatives. Three major programs aimed at alleviating student debt have either been struck down by the Supreme Court or are entangled in ongoing litigation.

One of the most anticipated initiatives was a student loan forgiveness program that aimed to provide up to $20,000 in debt relief for qualifying low- and middle-income borrowers. However, this program was ruled against by the Supreme Court in 2023.

The SAVE plan, which intends to lower monthly payments and expedite the path to loan forgiveness for borrowers, is currently on hold pending legal resolution. Additionally, another lawsuit challenges the administration’s recent attempts to offer further relief. This plan includes provisions for canceling accrued interest for borrowers with federal student loans that exceed their original balances, as well as debt cancellation for those who began repayment at least 20 years ago.

Despite these legal obstacles, the Biden administration has successfully approved the cancellation of approximately $169 billion in student loan debt for nearly 4.8 million borrowers through existing programs. This relief has primarily benefitted public-sector workers who have made a decade of payments, borrowers misled by educational institutions, and individuals with permanent disabilities.

Conclusion

As the grace period for student loan payments ends, borrowers face a new reality filled with potential risks for missed payments. With the SAVE plan’s future uncertain and ongoing legal battles surrounding student debt relief, it’s crucial for borrowers to stay informed and prepared for the changes ahead. Understanding these dynamics can help them navigate the complexities of student loan repayment and make informed decisions moving forward.