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Do’s And Don’ts On Getting Ready For The End Of The Student Loan Forbearance

Like cancer, student loans cannot be ignored.

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Last weekend, the White House press secretary told reporters that federal student loan payments will resume on February 1, 2022, after almost two years of forbearance due to COVID-19. As the repayment deadline approaches, additional guidance will be released to help borrowers transition back to repayment. Most people have gotten used to not paying their loans for a very long time and so the transition back will be uncomfortable. Here are some dos and don’ts that will help you transition.

DO make preparations. For those who have continued to make payments during the forbearance, they may not need to do much else. In fact, their payments may be considered pre-payments which means that they will not be considered delinquent if they miss a payment or two.

However, for those who did not pay during the forbearance period, they may not be able to afford the monthly payment due. If making lifestyle changes are not enough, they will have to contact their lender as soon as possible to adjust their monthly payment. This can be done by providing financial statements to the lender or the most recent tax return if it shows lower adjusted gross income from previous years.

And for those who are in default status, this may be the last opportunity to rehabilitate their loans without having to make large payments.

As stated above, keep an eye out for updated information from the government or loan servicers as they will provide instructions on restarting loan payments without accidentally missing a payment which can lead to late penalties or default status.

DON’T bet on another extension. Yes, there are bad things going on in the world right now. The Omicron variant is spreading although there are no indications of new shutdowns and more PPP money. And yes, some people — even members of Congress — are calling for another forbearance extension.

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But the Department of Education has made it clear that there will be no more extensions. It’s possible there could be another extension but it will likely happen when there is some massive catastrophic event. If there is another extension, then great. But until an announcement is made, act as though there will not be.

DO look at all of your options. Many people have changed jobs during the pandemic or are considering it. Some have lost jobs or are underemployed. Your current station in life might give you additional options.

If you have switched to working for the government or a 501(c)(3) nonprofit, then you may want to consider applying for the Public Service Loan Forgiveness 10-year repayment program. If you plan to work for the public sector for 10 years, your monthly payment will be a portion of your salary. After the 10-year period is up, the remainder of your federal student loan will be forgiven and the forgiven amount will not be taxed as income.

For those who switched to lower paying jobs, they may want to contact their lender to negotiate a lower monthly payment if they are on an income-based repayment plan (IBR) such as the traditional IBR plan, Pay As You Earn or the Revised Pay As You Earn.

For those who are fortunate enough to get higher-paying jobs, they may have to pay a higher monthly amount under their IBR plan. Also, if it appears that they will pay their loan in full, they should consider refinancing their loan with a lower interest rate. This should be strongly considered as it is likely that interest rates will rise next year.

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DON’T ignore your debt. For those who financed their education exclusively with federal loans, they were living their dream where for a short time, they were debt free. Some of these people think they can continue living this dream by ignoring their debt. Unfortunately, like cancer, student loans cannot be ignored or they will get bigger and worse, especially since interest will begin to accrue again.

Don’t wait until the final days before setting up a plan or contacting your lender. Not only will this put you in a more stressful position, you may have to wait longer before getting a response as other borrowers in similar situations will be frantically contacting their lenders as well.

DO have a long-term payment plan. It is generally a good idea to have a payoff plan that lasts several years or even a decade. This does not mean that you have to follow it strictly, as things may happen that may force you to make changes. But it may allow you to prepare for contingencies, manage your finances for other things like retirement savings, car or home purchases, family planning and even vacations and the occasional splurge we all deserve from time to time.

DON’T spend excessive time online begging for student loan forgiveness. We keep hearing on the news that some politicians are demanding student loan forgiveness of up to $50,000. If it was that simple, they would have passed a loan forgiveness bill by now instead of extending the loan forbearance started by the previous administration. Unfortunately, all of this posturing with no action is only creating false hope for debtors who otherwise spend their time doing things that will help pay the debt off and live a normal life. Loan forgiveness might come or it might not. Until it happens, don’t turn this into a time-consuming obsession.

The return to normalcy also means repaying our student loans again. It’s better to prepare and plan ahead now instead of delaying the inevitable.

Do you have the ability to pay off your student loans but choose not to? If so, please contact me and tell me why.

Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at stevenchungatl@gmail.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.

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