4 tips on repaying federal student loans by Philly financial experts

Don’t feel alone in the stress of student loans. At least 40 million other people are going through the pains of payments starting back up.

Since 2020, no payments have been required, and interest hasn’t been accruing on student loans issued by the federal government. However, those pandemic-era protections expired in October, and the monthly loan bills are back. But don’t fret; it’s a different landscape than before COVID-19.

For instance, the Biden administration rolled out a new student loan repayment plan, SAVE, to provide millions of Americans who make $15 per hour or less with $0 monthly loan bills. Tens of thousands of borrowers in Pennsylvania, New Jersey, and Delaware have had billions worth of student debt canceled through a variety of changes the U.S. Department of Education is making to income-driven repayment plans and Public Service Loan Forgiveness (PSLF), plus granting automatic relief for borrowers with total and permanent disabilities.

Additionally, a new program called “Fresh Start” takes loans out of default and restores borrowers’ access to assistance programs like SAVE or PSLF.

Starting this month, the average borrower will pay around $200 on their student loan bill, according to the consumer credit reporting company Experian.

There’s no right or wrong way to repay student loans, but the most crucial step is to plan and know your options. According to local experts who help operate the city’s free financial counseling services, Financial Empowerment Centers, the best way to start a plan is by visiting studentaid.gov, the U.S. Department of Education’s assistance and information hub for federal student loans.

In this guide, we’ll break down terms and concepts that you’ll run into when discussing student loans, with help from Will Hall and Tyler Young, who work within the city’s free financial counseling services, as well as Kristin McGuire, executive director for Young Invincibles, a social-action nonprofit that advocates for education financing reform on the national level.

Student loan deferment and forbearance allow borrowers experiencing financial setbacks to temporarily stop making payments or make smaller payments on loans without them going into default, which can put you at risk of damaging your credit score or worse. The catch is that interest will usually still grow on your loans.

Deferment is given to borrowers who are receiving cancer treatment, experiencing economic hardship, or are still in school, the military, or the Peace Corps. To qualify for an economic hardship deferment, a borrower needs to be receiving means-tested benefits like Medicaid or Supplemental Nutrition Assistance Program (SNAP, formerly called food stamps) or make 150% below the federal poverty line, which is $21,000 per year for a single household or $45,000 per year for a four-person household.

Forbearance is given to borrowers experiencing specific economic hardship, like increased medical expenses or changes in employment. It’s also given to medical or dentistry students in residency and people serving in the National Guard or an AmeriCorps position, among other reasons.

However, the U.S. Department of Education advises anyone considering deferment or forbearance to apply for an income-driven repayment plan instead. If you’re under financial hardship or in between jobs, you could be eligible for a $0 monthly bill. Additionally, your interest won’t grow under the SAVE plan, whether you can afford the accrued interest each month or not.

Income-driven repayment plans (often called IDR) allow federal student loan borrowers to pay a monthly student loan payment based on how much they earn, including other benefits. For many, IDRs are the best option for making student loan payments more affordable, at the possible cost of prolonging the time it takes to pay off the debt.

The SAVE repayment plan is a new plan that will give single borrowers making $32,800 or less per year (roughly $15 per hour) a $0 monthly loan bill. The same goes for families of four earning $67,500 or less per year. To learn more, check out The Inquirer’s guide.

According to experts, you can even combine this program with Public Service Loan Forgiveness — if you work for the government or a nonprofit — for lower payments and debt forgiveness after 10 years.

“The cool part about Public Service Loan Forgiveness is that it works in conjunction with many of these income-driven repayment plans. You can have a low payment for 10 years based on your income, and after 10 years, your outstanding balance will be forgiven,” McGuire said.

Apply for income-driven repayment plans at studentaid.gov/idr.

Student loan consolidation takes the multiple loans you might have, sometimes with different loan servicers, and combines them into a single new loan. This means you can try to get a better deal on your loan payments with a lower monthly bill and/or interest rate while simplifying loan payments into one bill.

The most important thing to remember is that if you have both private and public student loans, do not consolidate those loans into each other. “If you have public loans, keep them public,” Young said. Additionally, if you currently have a low interest rate, consolidating your loans could give you a higher one.

“Interest rates are pretty high right now as compared to what they used to be. I would not suggest consolidating if you’re paying low interest,” said Young. “But, if you are delinquent or in collections for your loans, consolidation might be a really good option to immediately pull those out of default. There could be also situations where consolidation would be negative. If you consolidate your public loans with your private loans, those public loans are no longer eligible for any of the repayment plans that are available.”

Apply for a Direct Consolidation Loan for public loans at studentaid.gov/manage-loans/consolidation.

Loan forgiveness or cancellation is when a borrower is no longer required to repay some or all of their loans. Many people became familiar with the term when the Biden administration attempted to cancel up to $20,000 of student debt for every federal loan borrower. However, that proposal was rejected by the Supreme Court.

The most common form of loan forgiveness is the Public Service Loan Forgiveness (PSLF) program for borrowers working in government or nonprofits. A borrower’s debt can be canceled after 10 years of making regular loan payments while working in public service.

“If you work for a qualifying employer, make sure you sign up for Public Service Loan Forgiveness as soon as possible. I use myself as a cautionary tale, as a first-generation college student, I didn’t know a lot about college financing,” said McGuire. “When Public Service Loan Forgiveness came out in 2007, I thought because I worked for a nonprofit, I would magically be in that program — I went eight years with a qualifying employer and never knew that I was not in the program.”

According to experts, people who don’t work in the public sector can also be eligible for debt forgiveness by enrolling in an income-driven repayment plan. After 20 years of regular payments, borrowers enrolled in income-driven repayment plans will be fully forgiven for any outstanding balance left on undergraduate loans.

Starting next year, some borrowers enrolled in the SAVE plan will be eligible to have their debt forgiven after 10 years of making payments if the original amount they borrowed was $12,000 or less. For borrowers who took out a loan for more than $12,000, they’ll add one more year to the repayment period for every $1,000 borrowed. For example, if the original amount you borrowed was $15,000, you will see forgiveness after 13 years of making regular payments. This caps out at 20 years for undergrads and 25 years for graduate students.