If you can't afford your federal student loan bills, just skip them

Borrowers worried about affording their federal student loan payments when they resume in October have an unusual option: They can skip them without worrying about the worst effects on their finances for a full year.

That’s because earlier this summer, the Biden administration announced a one-year grace period for borrowers. During that time, from October 1, 2023, to September 30, 2024, interest will still accrue on balances, but it won’t capitalize, meaning unpaid interest won’t get added to the principal balance to create a new, larger balance (and thus even more interest).

And during that 12-month period, missed payments will not be reported to credit bureaus, and borrowers will not be considered delinquent if they don’t pay.

That will help households that can’t afford the monthly payments, which average around $400, allowing them to focus on paying down other high-interest debt—credit card balances surpassed $1 trillion for the first time ever last quarter—or simply make ends meet.

Quite a few may need to take advantage: One in five borrowers may struggle to make their payments when they resume, the Consumer Financial Protection Bureau recently warned.

Still, if borrowers can afford to pay part of the monthly bills, they should, says Jacob Channel, senior economist at LendingTree. After all, if they skip payments, they will owe more in interest. But other deleterious actions, such as being sent to collections, won’t occur.

“Even if they can’t pay their fully monthly payment, paying something will help them keep their interest in check better than paying nothing will,” says Channel. “At the end of the day, extra interest makes paying back a loan more difficult and expensive.”

The grace period could also be good news for the economy. Some experts have predicted a student loan “cliff,” because tens of millions of households will have, potentially, hundreds less to spend each month on other things. Delaying repayments even longer can help some households continue their spending in other areas.

The Biden administration announced the “on ramp” to repayment after the U.S. Supreme Court blocked its widespread student loan forgiveness plan, which would have canceled up to $20,000 in debt for most federal borrowers. At the time, Biden also announced it was looking into a “Plan B” for forgiveness, and doubled down on a new income-driven repayment (IDR) plan that will lower monthly payments for many.

Channel encourages those who truly can’t afford their payments to enroll in an IDR plan ASAP.

“An income-driven repayment plan can help borrowers make their payments in full and on time without needing to worry as much about extra interest piling up,” he says.

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