What happens when the payment pause and interest waiver on your student loans ends?

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Federal student loan payments have been on pause since the passing of the CARES Act in March 2020. Borrowers have not been required to make payments toward their outstanding federal student loan balance, and their balance has not accrued interest during the pause. This forbearance period was meant to relieve some of the financial pressure millions of Americans were facing during the Covid-19 pandemic.

The forbearance period was originally slated to expire in September 2020, but it was extended through December 2020. It was then extended again through January 2021, and then again through September 2021. Recently, it was announced that the forbearance period would be extended one more time through December 31, 2022, in conjunction with the forgiveness of up to $20,000 in federal student loans per borrower. While the new extension has bought some borrowers a little more time to prepare to make payments again, many may be wondering what they can expect when payments resume.

Select spoke with two student loan experts about what borrowers can expect when it's time to resume payments on their federal student loans and interest begins accruing once again, as well as tips for how to prepare.

The pause on payments ends on Dec. 31, 2022. Borrowers will be expected to make monthly payments toward their debt balances from Jan. 1, 2023 and onward.

However, keep in mind that not all loan payments are due on the first of each month. For example, your payments may have been due on the ninth of each month. You'll want to contact your loan servicer to double check the date your payment will be due each month.

When payments resume, you'll have the same interest rate you paid prior to the forbearance period.

"Most federal loans have fixed interest rates," said Mark Kantrowitz, a financial expert and author of How To Appeal For More College Financial Aid. "Loans from decades ago might have had a variable rate since fixed rates became instituted in the 2006-2007 school year. Last year's rates were at a low of 2.75%. The waiver temporarily set interest rates at 0%, but once it expires, you're back to paying the interest rate you previously paid." 

Interest rates are set by Congress and are determined by 10-year Treasury notes plus a fixed percentage increase. Caps on interest rates are also determined and put in place; the caps are meant to prevent borrowers from paying even higher interest charges if the Treasury rates get even higher (the interest cap for federal loans for undergraduates, for example, is capped at 8.25%). Different types of federal loans carry different interest rates; the rates for direct unsubsidized loans for undergraduates will be different from the rates for direct PLUS loans, for example.

When it comes to repaying federal student loan money from college, borrowers often find that the interest charges rack up fast. And when you can only afford to pay the required minimum amount each month, it can certainly feel like your loan balance is ballooning faster than you can actually pay it off.

"Student loan payments were one less thing for people to worry about while they're trying to make ends meet," said Barry Coleman, the vice president of counseling and education programs at the National Foundation for Credit Counseling. "Some borrowers have chosen to continue paying their loans even during the forbearance period. Those were, of course, borrowers who could afford to do so."

Interest rates for the 2020–2021 school year hit their lowest levels in history at 2.75% for undergraduate students, 4.30% for graduate students and 5.30% for PLUS loan borrowers. However, student loans disbursed after July 1, 2021 will carry higher interest rates – 3.73% for undergraduate students, 5.28% for graduate students and 6.28% for PLUS loan borrowers.

The December deadline is a ways away, but borrowers can take a few steps to prepare and get ahead of any potential confusion and avoid payment mishaps.

First and foremost, make sure your loan servicer has your most updated contact information – especially if you moved during the last year and a half. Your loan servicer may try to contact you so you'll want to make sure you can receive any letters in the mail.

Then, you may want to consider your finances and figure out how making payments again will fit into your monthly spending. Chances are, your spending habits have changed a bit since before the pandemic. Now would be a good time to evaluate what that means for your student loan payments.

"The biggest advice I could give is to begin planning for the resumption of the payments right now," Coleman said. "Borrowers can plan now by reviewing their current budget so they know exactly what their expenses are and what they can afford to pay while meeting their other financial obligations."

For beginner-friendly budgeting, you may try the envelope method or opt for an app like Goodbudget.

And if you were previously on an autopay plan where your payment gets automatically withdrawn from your bank account each month, you should contact your loan servicer to make sure your payment details are still confirmed. And if you haven't previously been using autopay, you might consider it if your budget allows for it. "The key benefit to autopay, besides not worrying about being late on a payment, is that most lenders may give you an interest rate reduction because you're less likely to miss a payment when you use autopay," Kantrowitz said.

Some borrowers may even consider refinancing their student loans for a lower interest rate after the forbearance period ends. Refinancing means that you pretty much trade your existing loans for one new loan – in this case, your federal student loans would now be handled by a private lender.

Banks are some of the most common private lenders, but you can also refinance your loan through a fintech company like SoFi, which offers rates from 2.24%, and Commonbond which offers variable rates from 4.44% and fixed rates from 4.49%. A lower interest rate can help you save money over the long-run, and some lenders may even give you a lower monthly payment on the loan.

Lastly, if you're unable to resume your monthly payments, consider reaching out to your loan servicer for assistance as soon as possible. They can help you walk through additional options and in some cases, they might even extend your forbearance on an individual basis.