Half of student borrowers at increased risk of default, GAO says
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After two years of suspension of federal student loan payments due to the Covid pandemic, the government does not expect an easy process to repay millions of borrowers.
That’s according to a new report from the Government Accountability Office, which found that up to half of people with federal student debt may be at increased risk of delinquency.
The Education Department may also have outdated contact information for millions of borrowers, posing additional challenges for communicating about resuming payments, the GAO found.
Even before the pandemic, the country’s outstanding student debt exceeded $1.7 trillion and placed a greater burden on households than credit card or automobile debt. It is estimated that around a quarter of borrowers, or 10 million people, are in default.
As of now, student loan repayments are expected to resume in May. Here’s what borrowers worried about change should know.
If you can’t afford to pay your bill
If you are still unemployed or experiencing other financial hardship due to the pandemic, you will have options in May.
First, apply for a deferment for economic hardship or unemployment, experts say. These are the ideal ways to defer your federal student loan payments, as interest does not accrue under them.
If you don’t qualify for either, you can use an forbearance to continue to suspend your bills.
But keep in mind that the interest will increase and your balance will be larger, sometimes much larger, when you start paying again.
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If you expect your difficulties to last for a while, it may be a good idea to enroll in an income-oriented repayment plan. These programs aim to make borrowers’ payments more affordable by capping their monthly bills at a percentage of their discretionary income and canceling any remaining debt after 20 or 25 years. Some payouts are as low as $0.
To calculate how much your monthly bill will be under different plans, use one of the calculators from Studentaid.gov or Freestudentloanadvice.org, said Betsy Mayotte, president of the nonprofit Institute of Student Loan Advisors.
If you decide to change the reimbursement plan you had before the pandemic, Mayotte recommends that you submit this request to do so now with your repairer.
“I’m very concerned that there will be big delays in service” when payments resume, Mayotte said.
What if my repairer changes?
Three companies that handled federal student loans — Navient, the Pennsylvania Higher Education Assistance Agency, aka FedLoan, and Granite State — all recently announced they were ending their relationship with the government.
As a result, around 16 million borrowers will have a different business to deal with by the time payments resume, or soon after, according to student financial aid expert Mark Kantrowitz.
Check that your repairer has your current contact details, so you receive any notices of the upcoming change, experts say.
Affected borrowers should receive several notices about their new service, said Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade group for federal student loan services.
In May, if you mistakenly send a payment to your old repairer, the money must be transferred to your new one, Buchanan said.