Student loan payments have officially restarted after three-and-a-half years, as the COVID-19 payment and interest pause has come to an end. In an effort to make resuming payments a little easier, the Biden administration announced a 12-month "on-ramp" to repayment that allows borrowers with financial difficulty to wait a little longer to start making their federal student loan payments again.
While the on-ramp is certainly a valuable safety net for those who need it, there are a few things you should know before you decide to take advantage of it.
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It's the same idea as a forbearance
It's important to point out that this isn't exactly a new concept. The repayment on-ramp is essentially the same thing as a student loan forbearance, with the major difference being that you don't have to ask for it. If you want to take advantage of the on-ramp, simply don't make your student loan payments at any point through next September.
Like student loan forbearance, the on-ramp will eliminate most of the negative consequences of not making your student loan payments.
Specifically, you won't pay any late fees for missed payments during the on-ramp. You won't have the missed payments reported to the credit bureaus, and no collection activity will be initiated against you. And your loans won't be placed in default, even if you take advantage of the entire one-year on-ramp.
You'll still have to pay interest
The on ramp removes most of the negative consequences of not paying your student loans, as discussed in the previous section. But there's one big caveat – it does absolutely nothing about the interest that will build up on your account.
Consider this example. Let's say that you have $50,000 in student loan debt at an average interest rate of 6%. Each month that you take advantage of the on-ramp and skip your monthly student loan payment, you'll have $250 in unpaid interest that will accumulate on your account. If you use the entire 12-month on-ramp, your balance could end up $3,000 larger than where it started.
The SAVE plan could accomplish the same thing, but better
Before you decide to take advantage of the on-ramp, be sure to look into your other options, particularly the newly launched SAVE plan. Among other things, there are two key features that could make the SAVE plan a better choice than the repayment on-ramp.
First, the SAVE plan bases your monthly payment on your discretionary income, which is defined as any income exceeding 225% of the federal poverty level. To illustrate this, a family of four with income below $67,500 would have a $0 monthly student loan payment under the plan. So you may not even need the on-ramp.
Second, any unpaid interest that accumulates under the SAVE plan is forgiven. If you have $50,000 of student loan debt at 6% interest as in our previous example, and your required monthly payment is set at $0 under the SAVE plan, your balance will still be $50,000 in a year.
A nice safety net, if you really need it
The bottom line is that the student loan repayment on-ramp can certainly be a nice safety net if you really need more time before incorporating student loan repayment into your budget for the first time in over three years. But in order for using the on-ramp to make good financial sense, the answers to both of these questions must be a solid "no":
- Can you afford your monthly student loan payments as billed by your loan servicer?
- Can you lower your payment to a more affordable amount with the SAVE plan?
In a nutshell, the on-ramp will likely help certain borrowers manage the return to student loan repayment. But it's important to know the drawbacks and alternatives first.
