How Does the On-Ramp Period Impact Student Loans?

December 19 , 2023

After more than three years, student loan borrowers are once again required to make payments, which started in October. However, the Biden administration has introduced a lifeline known as the ‘On-Ramp Period,’ extending until September 30, 2024, which provides temporary relief from the harsh consequences of defaulting on student loans. While this period safeguards borrowers’ credit scores by preventing them from being reported as defaulters, it’s essential to understand the details, including the continued accrual of interest.

The On-Ramp Period: Mitigating Student Loan Consequences

The Biden Administration implemented a one-year “on-ramp” period to reduce or eliminate many of the adverse consequences of not paying your student loans. This period, running from October 1, 2023, to September 30, 2024, offers relief from delinquency, default, credit score damage, and other negative outcomes associated with non-payment.

• Under normal circumstances, when a federal student loan payment is missed, the loan becomes delinquent the following day. If a payment remains unpaid for 90 days, loan servicers report the delinquency to the three major credit bureaus, potentially harming the borrower’s credit score. A loan defaults after 270 days (approximately nine months) of non-payment, leading to more severe financial consequences, including further damage to the credit score, potential withholding of federal tax refunds or wages, loss of eligibility for additional federal student aid, and the possibility of legal action by the loan holder.

All federal student loan borrowers who qualified for the pandemic-related payment pause initiated in March 2020 are eligible for the “on-ramp” period. This includes borrowers with federal Direct Loans, Federal Family Education Loans, and Perkins Loans held by the Department of Education. Importantly, borrowers do not need to apply separately for this benefit.

However, it’s essential to exercise caution if you miss payments during this period. Interest will continue to accrue, and you’ll be responsible for paying it off once the on-ramp ends. Additionally, loan servicers may increase monthly payment amounts to ensure timely debt repayment, although this does not apply to borrowers enrolled in income-driven repayment plans, where payments are calculated based on income and family size. Furthermore, missing a payment means missing out on a month’s credit toward student loan forgiveness under specific repayment plans.

Income-Driven Repayment Plans

Prior to missing a payment, borrowers may want to explore income-driven repayment plans that could potentially lower their monthly payments. Income-driven repayment plans adjust your loan terms based on your income. There are four such plans available:

• Pay As You Earn (PAYE),
• Income-Based Repayment (IBR),
• Income-Contingent Repayment (ICR), and
• Saving on a Valuable Education (SAVE).

SAVE Income-Driven Repayment Plan

The Biden administration recently introduced the SAVE (Saving on a Valuable Education) income-driven repayment plan, which offers favorable terms and minimal monthly payments for lower-income borrowers.

Key Features of the SAVE Plan:

• Zero or Reduced Monthly Payments: If your income is below certain thresholds, you could be eligible for monthly payments as low as $0. Most borrowers will experience a significant reduction in their monthly payments.
• Interest-Free Balance: The SAVE plan offers an interest-free balance, where borrowers’ loan balances do not accrue interest as long as they make their monthly payments on time.
• Lower Required Payment Percentage: Undergraduate loan repayment is set at just 5% of discretionary income, significantly reducing monthly obligations. Those with graduate school loans will continue to pay 10%, while borrowers with both undergraduate and graduate loans will have a weighted average between 5% and 10%.
• Faster Loan Forgiveness: Borrowers with smaller loan balances can have their loans forgiven in just 10 years, making debt-free education a more realistic goal. For each additional $1,000 borrowed above $12,000, an extra year of repayment is required for loan forgiveness.

Loan Rehabilitation for Default Borrowers

Borrowers who entered default before the pandemic pause in March 2020 can seek assistance through the Department of Education’s “Fresh Start” program. Utilizing Fresh Start can transfer their loans from the Department of Education’s Default Resolution Group to a loan servicer, restoring them to an “in repayment” status and removing the default from their credit report. To access these benefits, borrowers can log in to myeddebt.ed.gov according to the Department of Education.

In summary, while student loan payments are resuming, the “on-ramp” period offers a temporary reprieve for borrowers, allowing them to avoid default and credit score damage. However, it’s crucial to be aware of the continued accrual of interest and consider repayment options like income-driven plans to manage the financial impact effectively. Borrowers in default also have the opportunity to rehabilitate their loans through the “Fresh Start” program.