As September 30, 2024, approaches, the clock is ticking for millions of student loan borrowers who have been benefiting from the temporary relief measures put in place during the COVID-19 pandemic.
The expiration of this program marks an important turning point, as federal student loan servicers will resume reporting missed or incomplete payments to credit agencies. This change could have lasting consequences for borrowers who fail to meet their payment obligations.
The end of the student loan payment “On-Ramp” period
The student loan payment “on-ramp” period, initiated by President Joe Biden, was designed to give borrowers time to adjust to the resumption of payments after nearly four years of forbearance.
During this period, which began in September 2023, borrowers were not penalized for missed payments, allowing them to gradually reintroduce student loan payments into their budgets without immediate repercussions on their credit scores.
However, this grace period ends on September 30, 2024, and borrowers who continue to miss payments said period will face the full consequences, including potential damage to their credit scores and negative marks on their credit reports.
According to data from the Department of Education, nearly 7 million borrowers were at least 30 days late on their loans as of March 2024, highlighting the widespread struggle to keep up with payments even during the on-ramp period.
Challenges with Income-Driven repayment plans
One of the challenges borrowers face is the uncertainty surrounding income-driven repayment (IDR) plans, particularly the Saving on a Valuable Education (SAVE) plan introduced by the Biden administration.
The SAVE plan, which aims to provide more affordable repayment options for borrowers based on their income and family size, has faced legal challenges that have prevented its full implementation.
In June 2024, the 8th Circuit Court of Appeals issued an injunction blocking the full implementation of the SAVE plan, creating confusion and uncertainty for borrowers counting on this program to help manage their payments. The injunction has also raised questions concerning the Biden administration’s authority to forgive student loan debt under other income-driven repayment plans and the Public Service Loan Forgiveness (PSLF) program.
As a result, borrowers who applied for IDR plans, including the SAVE plan, have seen their applications placed on hold, with federal student loan servicers pausing the processing of new applications. This has left many borrowers in limbo, unsure of their repayment options and facing the possibility of higher monthly payments once the on-ramp period ends.
What happens if you miss student loan payments?
Missing student loan payments can have serious consequences. Once the on-ramp period ends, student loans will be considered delinquent the day after payment is missed. If the total balance due is not paid within 90 days, the servicer may report the delinquency to the credit agencies. This delinquency can stay on a borrower’s credit report for up to seven years, affecting their ability to secure mortgages, credit cards, and other financial products.
The situation becomes even more dire if a loan goes into default. For most federal loans, except Perkins loans, default occurs after 270 days of nonpayment. At this point, the entire balance of the loan, including any unpaid interest, becomes due immediately. Borrowers in default lose eligibility for future federal student aid and access to forbearance and deferment options. Additionally, their credit scores can suffer, and they may face wage garnishment as a means of repayment.
Given the severe consequences of default, borrowers must explore all available options before missing a payment. This includes contacting loan servicers to discuss potential solutions such as deferment, forbearance, or alternative repayment plans. While the options may be limited, proactive communication with servicers can help borrowers avoid the worst-case default scenario.
