It may be time to put that student loan payment back into your monthly budget.
Last month, the U.S. Supreme Court threw out President Biden's student loan forgiveness plan. Then, on July 14, the Biden administration announced a new student loan forgiveness move that will eliminate $39 billion in student debt for more than 800,000 borrowers.
However, this narrower debt relief only applies to borrowers who have made 240 or 300 qualifying monthly payments on an income-driven repayment plan or standard repayment plan (this varies based on whether the borrower has a 20- or 25-year loan). Covered loans include Direct Loans or Federal Family Education Loans held by the Department of Education, including Parent PLUS Loans.
This means that, for most borrowers, interest on federal student loans will begin accruing again on Sept. 1, and payments will resume in October.
"The student loan space has been up and down, with tons of headlines about loan forgiveness," said Josh Denton, manager of product strategy, lending at BOK Financial®. "Now that repayment is coming back for many, it can be concerning for anyone who hasn't maintained a budget to account for that expense because it could be a hit to their monthly lifestyle."
How to prepare
Denton said the Court's ruling makes it important for borrowers "to anticipate the changes and start making adjustments." He offered these six tips:
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Figure out where you stand. Over the last couple of years, loan servicers have consolidated or moved loans around, so it's important to determine where your loan is held so you have all of the information you need. Visit StudentAid.gov to view your loan amounts and balances, so you're fully aware of your situation. If you're in a public service field, you might be eligible for the Public Service Loan Forgiveness program, which offers cancellation after 10 years of regular payments.
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Monthly budget. If you don't have a monthly budget in place, Denton said this is a good reason to start one. Knowing where your money is going and how much you have coming in is an important first step in identifying how you need to shift financial priorities or cut to make room for these payments.
Denton suggests splitting your budget into two categories: discretionary and non-discretionary. Non-discretionary consists of things like mortgage/rent payments, food, gas, utility bills, insurance, etc. Discretionary encompasses optional expenses like clothing, entertainment, eating out, traveling, subscriptions and more. "Getting all of those on paper is crucial," Denton said.
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Make adjustments. By using the budget and determining where excess money is going, you can start adjusting optional expenses. Things like streaming services or recurring subscriptions can add up throughout the month and you may identify places where you didn't know (or remember) money was being spent. Once you have a better picture of your spending, you can make better decisions around what can go.
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Consider refinancing. With current higher interest rates, there's probably not a lot of opportunity to refinance now. But if interest rates go down, it might be a good time to look at ways to refinance your existing debt obligations to reduce monthly payments.
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Apply excess funds to your loan. For some borrowers, excess deposits from pandemic relief funding or tax rebates from states (such as a recent one in New Mexico) might provide additional unexpected funds. You also may have socked away a recent bonus in a savings account. You may want to consider using some of your savings to pay down your student loans or pay them off altogether if possible, so you can avoid the stress of fitting more payments into your budget.
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Check your interest. Most federal student loans are fixed rate, but in a few cases, you may see a variable rate loan. In this case, you might have some payment shock when repayment begins again. Denton said we're in a very different rate environment than 2020, so knowing your current rate—and therefore your payment—is important in preparation for repayment to begin again this fall. There might also be an opportunity to refinance depending on your current situation (it might be best to talk to a professional if this applies to you).
What's next?
After the Supreme Court decision, the Biden administration outlined a temporary 12-month "on-ramp" for loan repayment on June 30. In it, Biden said that if borrowers can pay their bills, they should, but that the on-ramp is designed to temporarily remove the threat of default or harming credit if a payment is missed.
Regardless of what else happens in the student loan arena, Denton anticipates there will be a long-term effect on student loan borrowers.
"It's likely to put a damper on aspirational borrowing such as buying a home or upgrading a car, and without proper planning could cause further reliance on what's considered 'bad debt,' such as payday loans," he said.
"Stay on top of what's happening in the world of student loan forgiveness," he advised. "While it's hard to know what will happen day-to-day, it's important to plan for the worst and be prepared for whatever obligations you've committed to."
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