If you’re one of the millions who applied for student debt forgiveness, are you ready to start making your obligated education loan payments again? If not, you have about 60 days to prepare for it.
Student loan payments that paused due to COVID will resume this fall. Student loan interest will begin accruing again on September 1st and payments will re-start in October.
Here’s what will happen if you fail to make your education loan payments…
Education loan providers report your payment history to the credit reporting bureau. Failure to make your on-time monthly payments can significantly lower your credit score. Missing multiple payments may result in your loan being transferred to collections. If this happens, you can expect your credit score to drop even more AND you will officially have delinquent FEDERAL debt.
Not only can collections stick on your credit report for up to seven years, having delinquent federal debt can impact your ability to qualify for other federally backed programs such as VA, FHA, USDA home loans. That’s right, if you end up with delinquent federal debt, you can expect your name to pop up on “CAIVRS” (Credit Alert Verification Reporting System). And you don’t want this! CAIVRS is a federal government database of delinquent federal debtors that allows federal agencies to reduce the risk to federal loan and guarantee programs. Not good!
The Good
Requiring millions to begin making their student loan payments is good for inflation. That means, this will help cool off inflation. We desperately need inflation to cool off. How? According to The New York Times, three years of relief from student loan payment has totaled nearly $1.6 TRILLION. According to TheCollegeInvestor.com, 45 million people now carry a collective $1.7 trillion in student loans with the median payment for student loan borrowers coming in at $222 per month. Doing the math, that totals nearly $9.9 billion per month if everyone began making their payments again.
Given that few have budgeted an extra $222 to begin paying monthly, this will require many to shift their budget. That means, $222 will shift from other desirable (non-required) expenses to student loan payments. As the U.S. economy feels the shift in nearly $9.9 billion monthly from consumer goods, we can expect overall production to go down, which will translate into a decrease in earnings and an increase in unemployment. This, in turn, will cool off inflation and as inflation cools off, so will interest rates.
The Bad
Housing inventory is already at historic lows. HousingWire claims that the U.S. reached an all-time low in housing inventory during 2022 and in order to get back to pre-COVID-19 sales range, we need existing home sales to average between 4.72 and 5.31 million for at least 12 months. We are currently in between 4 million and 4.6 million as of April 2023. If mortgage rates drop too fast, too soon, demand for housing may increase even more. This will cause home prices to continue increasing and will not help with the U.S. affordable housing crisis.
The Ugly
Everyone has their opinion on whether the Supreme Court’s decision was right or not. It’s likely close to a 50/50 split as with just about every other major current event that hits headlines. Those who signed and agreed to pay their student debt back but feel like they shouldn’t have to and decide not to make their payments will face financial consequences, i.e. delinquent federal debt, destroyed credit scores, inability to finance future purchases, etc…
Those who signed and agreed to pay their student debt back but will reluctantly (or not) take responsibility for their commitment and begin paying upon the due date, please check out my tips below to help ensure that your credit is not damaged.
Those who no longer have student debt and followed through with their commitment to pay off their debt, keep your chin up and know that you should be proud of yourselves.
Steps to prepare paying for your student loan debt:
1. Log into your account and verify your balance, when your first payment will be due and how much your first payment will be. Make sure your up to date contact information is included.
2. Verify if your loan has been transferred to a different servicer. It’s important to know who is managing your loan. Confirm who that is and ensure they have your correct contact information.
3. Start saving. Begin setting aside each month however much your minimum monthly payment will be for your student loan. This way, your budget will be better prepared for when the payment is due.
4. Can’t afford the payment? Contact the student loan servicer and ask about “income-driven repayment plan” also known as income-based repayment plan.
Like what you’re reading? Check out my other articles at TheHomeLoanHub.com
Terry Roberts, USMC Veteran Sr. Mortgage Broker NMLS 397987 E Mortgage Capital, NMLS 1416824
Terry Roberts is a U.S. Marine Corps Veteran and specializes in residential mortgages, including new construction, conventional, FHA, and VA home loans. He has helped more than 10,000 clients start the home buying process across America.
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