Over half of student loan borrowers racked up credit card debt during the payment pause—now experts worry about 'shock'

Federal student loan borrowers have had a break from paying back their student loans for over three years now. 

Though the forbearance may have given them breathing room, helped them add to their savings or pay down other debts, inflation creeping up throughout 2022 undermined a lot of that progress.

Over 50% of borrowers added debt on regular credit cards during the student loan payment pause and another 31% racked up balances on retail cards, a recent TransUnion analysis found.

Now, with the worst of the pandemic in the rearview, borrowers will be required to start making payments again in October. Many will have to work to get out of credit card debt at the same time. Experts worry lots of them won't be able to keep up.

Here's what's coming for student loan borrowers this fall.

Concerned that borrowers will have trouble making payments when they resume, the Biden administration has put some safeguards in place, including a 12-month payment "on-ramp" grace period. From October 2023 through Sept. 30, 2024, missed monthly payments will not be considered delinquent, reported to credit bureaus, placed in default or referred to debt collection agencies. 

Unlike during the pandemic forbearance, interest will begin accruing on federal student loans in September. That means that even if borrowers don't make payments, their balances will continue to grow.

And more student loan relief doesn't address the problem of the other debts borrowers have added.

"Over the past three years, [student loan borrowers] have opened credit cards, they've opened auto loans and mortgages, they've taken on additional debt," Liz Pagel, senior vice president and consumer lending business leader at TransUnion, tells CNBC Make It. 

It's plausible many of those additional monthly debt payments are up to or greater than what borrowers were paying on their student loans prior to the payment pause, Pagel notes.

"Then you tack on $300 [student debt payment] for the average consumer and that's a pretty significant payment shock," she says.

Pagel and other experts anticipate that many student loan borrowers will struggle to make their payments, especially while balancing other obligations, such as car payments and credit card balances.

So what should borrowers focus on first?

"The smart consumer will prioritize whatever [payment] is going to affect their [credit] score," Pagel says. "The smart consumer also will do everything in their power to start making payments so they're not accruing interest on something they're not making payments on." 

Aim to pay at least the minimum on all of your debts on time. If you can't, it may make sense to prioritize credit card payments first. That's because the student loan delinquency grace period may delay any impact to your credit score if you can't make your payments. 

Credit cards and other debts, on the other hand, are typically delinquent 30 days after you miss a payment. At that point, your lender may report the missed payment to the credit bureaus, which can significantly bring down your credit score.

One of the primary benefits of federal student loans is having a bit more flexibility than private loans if you can't afford your monthly payment. Explore these options before payments resume in October.

There are four income-driven repayment plans intended to make your monthly student loan payment as affordable as possible. Each IDR sets your payment, which could be as low as $0, at a percentage of your discretionary income. Any remaining balance is forgiven after the loan term, usually 20 or 25 years.

Here are the available options:

• Saving on a Valuable Education. Under the newest IDR, which replaces the Revised Pay As You Earn plan, borrowers can apply for the SAVE IDR plan. It could save you at least $1,000 a year compared to other IDR plans, according to the Department of Education.
  
  Your monthly payment is 10% of your discretionary income. Under the SAVE plan, your discretionary income is defined as any income over 225% of the federal poverty line.
  
• Pay As You Earn. For borrowers with loans disbursed on or after October 1, 2011, the PAYE plan sets your monthly payment as 10% of your discretionary income. But on PAYE, your discretionary income is defined as any income over 150% of the federal poverty line. You may only qualify for this plan if that amount is less than what you would pay on the standard repayment plan.
  
  The PAYE plan is generally best for borrowers with debt amounts higher than their annual discretionary income.
  
• Income Based Repayment. As with PAYE, borrowers' monthly payment on IBR must be lower than what they would pay on the standard repayment plan. Payments on IBR are 10% or 15% of your discretionary income, depending on when you took out your loans.
  
• Income Contingent Repayment. Your monthly payment on an ICR plan would be the lesser of 20% of your discretionary income, or "the amount you would pay on a repayment plan with a fixed payment over 12 years, adjusted according to your income," according to Federal Student Aid. This is the only IDR option for borrowers with parent PLUS loans, though they must consolidate into a direct consolidation loan first.

You can see which plan will offer you the lowest monthly payment by inputting your information into the FSA loan simulator tool.

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