These student loan grace periods end this month. Are you prepared?
A pair of programs designed to help student loan borrowers struggling with their payments will sunset on Monday, with major financial implications for millions of Americans.
The Biden administration has allowed borrowers to ease their way back into repayment after a more than three-year pause by offering a 12-month grace period, known as the on-ramp. The initiative effectively shielded people from the consequences of missing payments, such as negative credit reporting.
At the same time, anyone in default on a federal loan held by the Education Department has been able to bring their debt back into good standing through the “Fresh Start” initiative. The program restored borrowers’ eligibility for financial aid and removed the default from their credit history.
Advocacy groups have hailed both programs as critical safety nets, and some worry that borrowers will suffer in their absence. Here’s what you need to know as these temporary programs come to an end.
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What is the on-ramp?
The Biden administration created the on-ramp to transition federal student loan borrowers back into repayment after a more than three-year moratorium brought on by the covid-19 pandemic. During that payment pause, tens of millions of borrowers were placed in a forbearance in which interest did not accrue on their loans and they received credit toward loan forgiveness programs.
When borrowers were required to resume paying on their loans in October 2023, the Biden administration offered a 12-month grace period in which any missed loan payments would not be reported to the credit agencies.
The on-ramp has functioned as a retroactive forbearance, meaning the Education Department did not move delinquent borrowers closer to default and enforce collections. The on-ramp grace period, however, did not provide credit toward loan forgiveness programs, nor spare borrowers from accrued interest.
Still, the temporary grace period has benefited many borrowers. In the first three months of operation, the initiative shielded 6.7 million delinquent borrowers from negative credit reporting, according to the Education Department.
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What is Fresh Start?
While federal student loan borrowers had their payments paused, the Biden administration devised a plan in 2022 to lift 7.5 million of them out of default. Federal student loan borrowers are considered in default when they haven’t made a voluntary payment in at least 270 days, and before the payment pause 1 million people defaulted on their loans every year.
Fresh Start was created to address the risk of borrowers falling behind on their payments when the moratorium ended, a concern raised by the Government Accountability Office. It restored eligibility for federal Pell Grants, work-study and loans - benefits that are typically stripped from borrowers who fall severely behind on their payments.
Borrowers were eligible for Fresh Start if they had defaulted on a federal loan made directly by the Education Department, a Perkins loan held by the agency, or old bank-based debt held by the department or private companies.
Anyone who fit those criteria was automatically spared collection efforts, such as having their wages garnisheed or tax refunds seized to repay their student loans, while Fresh Start is in place.
However, borrowers must contact the Education Department’s Default Resolution Group or the company holding their loan to make a payment arrangement and get out of default before the temporary program ends on Monday. Doing so will result in the removal of the default from a borrower’s credit report.
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What happens after these programs end?
When the on-ramp and Fresh Start come to an end, borrowers who miss payments and wind up in default could face the full force of the federal government’s collection powers, including the seizure of wages, tax refunds and Social Security benefits.
The Education Department typically reports borrowers as delinquent to credit rating agencies, such as Experian and TransUnion, when they become 90 days past due on their loans. That level of delinquency can lower your credit score and make it more expensive to take out other loans.
It takes 270 days of missed payments before the department places a borrower in default, putting them at risk of involuntary collection. Time spent in delinquency or default typically doesn’t count toward student loan forgiveness programs.
To prevent borrowers from falling behind on their payments once the on-ramp and Fresh Start concluded, the Biden administration has been promoting enrollment in the new income-driven plan, known as Saving on a Valuable Education, or Save. Save offers borrowers low monthly payments and a faster route to loan forgiveness than other repayment options, but a court injunction has placed the plan on ice amid ongoing litigation brought by Republican-led states.
The legal challenge has upended the federal student loan repayment system, leading the Education Department to place Save enrollees in forbearance and pause the processing of applications for other income-driven repayment plans.
Borrowers in need of a low monthly payment can still apply for Save and other income-driven plans, but their servicers will be subjected to lengthy delays, according to the department. During that time, servicers can postpone an applicant’s payments but interest will continue to accrue and the borrower will not get credit toward loan forgiveness.
In light of the chaos, activists and advocacy groups have urged the department to extend the on-ramp period while the litigation continues. The department says a provision in the Fiscal Responsibility Act prevents the agency from extending the grace period.