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Biden Administration Gives Student Loan Borrowers Some Leeway When Payments Restart

U.S. President Joe Biden is joined by Education Secretary Miguel Cardona as he announces new actions to protect borrowers after the Supreme Court struck down his student loan forgiveness plan in the Roosevelt Room at the White House on June 30, 2023 in Washington, DC.
Chip Somodevilla | Getty
  • After federal student loan payments restart in the fall, borrowers will be spared for 12 months from the harshest consequences of falling behind.
  • President Joe Biden announced the provision easing borrowers back into repayment after the Supreme Court struck down his forgiveness policy.
  • The Consumer Financial Protection Bureau recently warned that roughly 1 in 5 student loan borrowers could struggle when their payments resume.

When federal student loan payments finally restart in the fall, the Biden administration will offer borrowers some elbow room.

The U.S. Department of Education will institute a 12-month "on ramp" to repayment, which will run from Oct. 1, 2023, to Sept. 30, 2024. During that period, borrowers will be shielded from the worst consequences of missed payments.

Borrowers may need that leeway: The Consumer Financial Protection Bureau recently warned that roughly 1 in 5 student loan borrowers could struggle when their payments resume.

Here's what to know.

Extra protections follow Supreme Court decision

President Joe Biden announced the provision easing borrowers back into repayment on Friday afternoon, hours after the Supreme Court struck down his student loan forgiveness plan.

Before the ruling, the Biden administration said that resuming student loan payments without being able to carry out its debt forgiveness could trigger a historic spike in defaults and delinquencies.

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"Even if the risk from the virus has diminished, the financial fallout has not," said Persis Yu, deputy executive director at the Student Borrower Protection Center, an advocacy group.

In an acknowledgment of the challenges that could lie ahead for borrowers, Biden said missing a payment won't lead to many of the usual penalties for a year after the bills resume. In addition, the president said his administration would try to find another way to deliver on student debt forgiveness.

This aid is not another payment pause extension

Former President Donald Trump first announced the stay on federal student loan bills and the accrual of interest in March 2020, when the coronavirus pandemic hit the U.S. and crippled the economy. The pause has since been extended eight times.

The latest announcement by Biden is not another extension of that policy.

Even if the president wanted to prolong the relief, the recent bipartisan agreement to raise the federal debt ceiling included a provision that officially terminates the more than three-year-long pause at the end of August. (Borrowers' official due date will depend on their loan terms.)

However, borrowers will be spared from many of the usual consequences of missing a payment until October of next year.

For example, loans will not go into default and delinquencies will not be reported to credit reporting agencies, said higher education expert Mark Kantrowitz. Late fees won't be charged, either.

"The 12-month on-ramp is similar to a forbearance in many ways," Kantrowitz said.

But as is the case with a forbearance, interest will continue accruing on your debt while you don't make payments. As a result, Kantrowitz recommends borrowers start repaying their bills, if they can.

"Doing otherwise will eventually hurt them," he said.

Copyright CNBC
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