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Federal student loan repayments start again soon: How to prepare, and what to do if you can't pay

"Even amid a newly stressful financial challenge, we want to try to protect our long-term financial outlook."

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Because of the pandemic, federal student loan borrowers have gone more than a year without having to make a payment. That forbearance period is set to end on September 30.

Lawmakers enacted student debt relief last spring to help ease the financial woes many Americans faced after Covid hit. Federal loan providers paused monthly payments and dropped interest rates to 0%. It turns out a lot of people needed that break — and many still do.

Just 11% of student loan borrowers are currently in repayment, according to data analyzed by education expert Mark Kantrowitz, meaning most have taken advantage of the reprieve. And despite this nearly 18-month grace period, the vast majority of borrowers say they need more time as they juggle other obligations.

Over the past year, some younger Americans got married, started families, and purchased homes, while others are cash-strapped, looking for work, or still getting back on their feet. Whatever the context, most aren't in a good place for loans to resume: In a Student Debt Crisis poll of nearly 24,000 borrowers, a staggering 90% said they aren't prepared to start paying loans again when forbearance ends.

The White House is under mounting pressure to give borrowers more time. In June 2021, Senator Elizabeth Warren, D-MA, and Senate Majority Leader Chuck Schumer, D-NY, sent a letter to President Joe Biden asking him to postpone payments until at least March 2022; they've since written him again, arguing that student loan servicers are just as unprepared as borrowers for payments to resume. Other organizations, including the American Civil Liberties Union, have also backed an extension.

For now, borrowers shouldn't count on a reprieve. If you're struggling financially, here are some options for dealing with your student loan payments come September.

If you can't repay your student loans at all

There are more than 42 million U.S. student-loan borrowers and they owe a total of $1.7 trillion, the Federal Reserve notes. The average 25-to 34-year-old borrower owes $33,817, while the average 35-to-49-year-old owes $42,373.

That level of debt can seem insurmountable in the face of Covid-related unemployment. More than 22.3 million people were laid off in March and April 2020, and total employment is still 7.13 million jobs below its February 2020 level. As of June, nearly 3 million Americans have been out of work for a year or more.

If your financial circumstances mean you won't be able to meet even the minimum payment requirement, you should "talk with your loan servicer about your options," says Kantrowitz.

They may advise applying for an unemployment deferment, which can pause payments for up to 36 months. It does, however, require borrowers to reapply every six months, show proof of unemployment benefits, and verify that they're seeking employment.

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Keep in mind that deferment isn't necessarily the best long-term choice, since compound interest will accumulate as you put off payments. "If the interest is not paid as it accrues, it will be capitalized (added to the loan balance) at the end of the deferment or forbearance period," Kantrowitz says.

Before deferring, reconsider alternatives "such as cutting back even further on expenses, or asking a family member for help," Kevin Mahoney, CFP, founder of Illumint in Washington, D.C., previously told Grow. "These choices never feel good, but even amid a newly stressful financial challenge, we want to try to protect our long-term financial outlook."

If you can pay something but not the full amount

For borrowers who were affected by the pandemic but can still afford to partly repay, there are some options. One that could make sense is an income-based repayment plan, which caps the amount you owe based on the amount of discretionary income you have. "[If your] income is less than 150% of the poverty line, your monthly loan payment will be zero," says Kantrowitz.

Going this route can lower monthly payments, but it also increases the time it will take to pay off the full loan amount, meaning a larger overall bill.

"Depending on which of the four income-driven repayment plans they choose and the types of federal loans (subsidized or unsubsidized), all or part of the accrued but unpaid interest will be paid by the federal government," Kantrowitz explains. "If the borrower's income has changed, they can ask the loan servicer to recertify their income early, using the alternative documentation of income process."

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Whatever your money situation is, plan ahead

Even if you've been able to keep making loan or interest payments during the break, now is a good time to create a repayment plan, or revisit an existing one, as the official restart nears. History shows that when the Department of Education previously applied loan forbearances, delinquency rates rose when payments resumed. 

Get organized by making a spreadsheet that contains key intel about each of your loans, such as balances, interest rates, and due dates. Start setting aside part of your income as if you're using it for your loan payments, so that you can get reacquainted with the change. If you need extra cash to tackle your debt, consider picking up a side hustle.

One thing you shouldn't plan on: student loan forgiveness. While Biden has canceled loans for some victims of fraud, he didn't include debt cancellation in his annual budget request to Congress. "There is certainly a chance" for future cancellation, Brookings Metropolitan Policy Program senior fellow Andre M. Perry told CNBC in June. Until that's a reality, though, it's smart to focus on actions you can take to get back on track with repayments.

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