Student loan borrowers approach payment restart with apprehension, confusion

Lamesha C. Brown had seen it before: an email from the Education Department alerting of the looming restart of her student loan payments.

But this time was supposed to be different, as Congress had passed a bill to stop any additional extension of a payment pause first implemented three years ago during the coronavirus pandemic.

Still, Brown was skeptical.

The email had arrived on the heels of the Supreme Court striking down President Biden’s student loan forgiveness program, which would have nearly halved the $93,000 in student loans that Brown and her husband collectively owe. But the pair had heard the president would seek another route for relief, and wondered how long that would take - and how it would impact the payments they were supposedly set to make soon.

“This doesn’t feel 100 percent real yet,” said Brown, who works in college administration in Philadelphia. “We’ve been here before. There are so many things being said about new strategies, new plans. It’s definitely confusing and hard to make plans until you know exactly what will be.”

After all of the twists and turns of the last three years, federal student loan borrowers are experiencing a bit of fatigue and confusion as payments are set to resume in October. The string of extensions - eight since the pause was first introduced in 2020 - has left some in disbelief that the moratorium is finally coming to an end, while others are overwhelmed by their options and the prospects of adding another bill to their budget.

The Biden administration has launched efforts to ease more than 40 million people back into repayment and make their bills more affordable. But the rollout of those plans has also sparked some confusion.

The administration is offering a 12-month grace period in which any missed loan payments won’t be reported to the credit agencies. But some borrowers perceive this on-ramp, as the Education Department calls it, as an informal extension of the payment moratorium.

Undersecretary James Kvaal cautioned against that while speaking at a conference last month by the National Association of Student Financial Aid Administrators. “It’s not a pause,” Kvaal told the audience. “Our advice to people is you should be making payments.”

Interest will accrue on their student loans during the on-ramp period, unlike for the payment pause, he said. And those months will no longer count toward income-driven repayment or Public Service Loan Forgiveness, Kvaal pointed out.

The “on-ramp” period will function as a retroactive forbearance, meaning the Education Department will not move delinquent borrowers closer to default and enforce collections.

“In the conversations that I’ve had with borrowers, there’s a lot of uncertainty and anxiety and confusion. But when you walk them through . . . the resources that are available in many cases, it helps a great deal,” Kvaal said.

One of those resources is the Biden administration’s new income-driven repayment plan - Saving on a Valuable Education plan, commonly known as SAVE - which ties monthly payments to earnings and family size. The White House has estimated the plan could help the typical borrower save $1,000 a year on payments because it reduces the amount of income used to calculate monthly bills.

While the plan takes full effect in 2024, borrowers can enroll now and some components are being implemented this summer. Chief among them is raising the amount of income that is exempted from the calculation of a borrower’s monthly payment. Instead of exempting earnings above 150 percent of the federal poverty guidelines, the government will increase the threshold to 225 percent. That change means a single borrower who earns under $15 an hour does not have to make payments under the new plan.

People with higher incomes, however, will have to wait until next year to see their payments slashed from 10 percent of their discretionary earnings to 5 percent for those with only undergraduate loans, and a weighted average between 5 percent and 10 percent for those who also have graduate loans.

Dorien Rogers, 23, finds the phased rollout perplexing.

“People need consistency,” said Rogers, a Montgomery County, Md., resident who owes about $50,000 from his undergraduate and graduate studies. “Why not put all of the plan in place at the same time? It’s a good option, but the way they’re doing it is confusing.”

October will mark the first time Rogers, who graduated from Salisbury University in 2022, will make payments on his student loans. Although he can defer the bill while finishing up a master’s in public administration at Purdue Global, Rogers is keen on making some headway on his debt. He plans to enroll in the new income-driven plan, hoping that his payments will be manageable. Rogers already has two jobs as a substitute teacher and DoorDash delivery person, and no interest in taking on a third.

Brown and her husband are also considering the new income-driven plan, but worry that their combined earnings - which have grown since the pandemic - will result in a high monthly bill. The pair could have each other’s income excluded from the calculation of their monthly bill under SAVE, but only if they file their taxes separately.

Separating taxes could leave some couples with a staggering tax bill.

Jason Roy, a nurse practitioner in North Carolina, estimates that he and his wife could owe about $8,800 in taxes if they file separately to take advantage of the new plan. When the Education Department launched a beta application for SAVE last month, Roy, 44, learned it could save him hundreds of dollars on his monthly student loan bill. But he is still wrestling with whether it is worth the tax hit.

“It feels like you’re kind of swimming against the tide no matter which way you turn,” said Roy, who graduated in 2019 from a master’s program with $82,000 in student loans months before the first pandemic payment pause began. “If that calculator is correct, then we should have extra money to set aside and pay our taxes. Maybe I can adjust my withholdings or make estimated payments.”

Some borrowers who were automatically switched from another income-driven plan to SAVE have complained of seeing much higher monthly payments than anticipated when they pulled up their accounts. Servicers have until the end of August to recalculate those borrowers’ payments under the new rules, according to several servicing companies.

But that’s not the only glitch borrowers are encountering.

When Justin Brown, 38, logged into his account a few weeks ago, he was stunned to see a zero balance instead of the $20,000 he owes. He didn’t qualify for any sort of loan forgiveness to his knowledge, so the newfound fortune was puzzling. Brown called his brother to celebrate, but upon closer inspection learned the zero balance was a placeholder while his account was being transferred to a new student loan servicing company.

“It was a little bit of a gut punch,” Brown said. “Talk about bad communication. It doesn’t build confidence in the system.”

Having confidence in the repayment system is especially important to Brown because so much has changed in his life in the last three years. He became a husband, a father and a homeowner during the pandemic, taking on a host of new responsibilities and expenses that makes the addition of another bill even more daunting

For its part, the Education Department is ramping up its communication with borrowers, as will its student loan servicers over the coming weeks. The federal agency has posted a wealth of information on its website about available repayment plans and is also touting the options on social media.

“We want to make sure borrowers know that we’re here to help them,” Kvaal said. “This is a challenging time for them. There is a lot of anxiety and concern that I hear from students. We all need to make sure they understand what resources are available to help them.”