Get Ready for the Return of Student Loans

Are you ready? After a series of pandemic-related suspensions, thwarted forgiveness attempts, and court challenges, federal student loan payments are coming back.

As things stand, interest will start accumulating on federal student loan balances from Sept. 1, and the first payments are due in October. (Check with your loan servicer about the actual start date.)

If you've grown accustomed to having some extra play in your budget, now's the time to start preparing so you don't feel the squeeze when that first payment notice arrives. Similarly, if you have a graduate in your life, you can help them prepare.

Here are some tips to consider.

The federal loan "pause" still has a few months to go. Any payments you make now will go toward your principal since the interest rate is temporarily 0%.

Note: If you work for the federal, state, local, or a tribal government, serve in the military, or are in the nonprofit sector, you may qualify for the Public Service Loan Forgiveness (PSLF). Under that program, you may have some of your balance forgiven after you've made 120 qualifying monthly payments under a qualifying repayment plan. The government also offers income-driven repayment plans, which could lower your payments. If you qualify for either of those programs, you may want to discuss your situation with your loan servicer about whether paying down principal now makes sense.

The Consolidated Appropriations Act of 2021 allows employers to provide up to $5,250 annually for student loan assistance as a tax-free benefit until Dec. 31, 2026. This provision is temporary, and voluntary for employers, but if available, such offerings could help you pay down your loans faster.

According to the Department of Education, most federal student loans are eligible for an income-driven repayment plan, which aim to offer "affordable" monthly payments based on income or family size. If your income is low enough, your monthly payment could be as low as $0 while you're participating in the program.

There are four such plans: the Pay as You Earn Repayment Plan (PAYE Plan), the Income-Based Repayment Plan (IBR Plan), the Income-Contingent Repayment Plan (ICR Plan), and the recently announced Saving on a Valuable Education (SAVE) Plan. This last one has replaced the Department of Education's Revised Pay as You Earn Repayment Plan and offers more lenient terms to lower- and middle-class borrowers.

These programs may allow you to stretch your loan repayment out over a longer period, reduce monthly repayment amounts, and apply for temporary deferments and forbearances. Each program also offers to forgive your loan after you've participated for a defined period (ranging from 20 to 25 years). You are allowed to change repayment plans anytime at no cost and without hurting your forgiveness schedule.

Parents with parent PLUS loans could potentially lower their payments by consolidating them with a direct loan from the federal government and then repaying using the ICR plan. Parents can use the Department of Education's loan simulator to check for potential benefits.

If you have a higher income, you may not benefit from longer payouts, interest deferments, or loan forgiveness, but you can still find ways to optimize your repayment plan. One option would be investigating the private student loan market to see if you could refinance at a lower interest rate. Remember, this is a one-shot deal. Once you move out of federal loans, you can never go back.

Family members (or anyone) can use the annual gift exclusion—$17,000 in 2023—to help pay down student loan debt. If parents have excess 529 funds, they could use up to the $10,000 lifetime limit per beneficiary to pay down student loans.