How to Prepare for the Student Loan Unpause in 2023

Photo by Joshua Hoehne on Unsplash

Debt is the worst - it can kill your ability to stay afloat and get ahead financially. There are times when taking on debt for the short term is useful, such as pursuing higher education to increase your income. Notice the italics in the prior sentence? Short term. If you plan on taking on debt, especially higher-interest debt, your goal should be to pay it off as soon as possible.

Due to the COVID-19 pandemic, those carrying federal student loans had their interest rates slashed to 0% and weren't required to make any payments. Not a bad deal. The challenge is millions of people took these payments out of their budget and now are in a bind now that the student loan unpause is coming in August. According to a recent update from the Consumer Financial Protection Bureau, roughly half of the 43 million federal student loan holders have taken on additional debt. This includes mortgages, car loans, and credit cards. Layer on the fact that the average student loan payment is roughly $337 per month, and it's no wonder that the student loan unpause is causing all sorts of heartburn for millions at the moment.

Key facts about the student loan unpause

Your first student loan payment will be due in September 2023

In June 2023, as part of the Fiscal Responsibility Act of 2023, Congress required that the student loan pause end on August 29, 2023. As of August 30, 2023, federal student loans will begin accruing interest again and payments will resume.

 Interest rates will return to their pre-pandemic amount

As of August 30, 2023, expect your student loan interest rate to jump from 0% to whatever it was prior to the pause starting in March 2020. It's also being reported that the Department of Education has wiped its system of all auto-debit information, meaning that you'll need to set up auto-draft again if you so choose. According to The College Investor, those who defaulted on their loans before the pause may qualify for the "fresh start" program, allowing their loans to resume their current status.

The proposed $10,000-$20,000 Student loan forgiveness plan has been struck down

On June 30. 2023, the Supreme Court struck down the Biden Administration's proposal to forgive at least $10,000 of student loan debt for those that qualify. While the 6-3 ruling against the proposal is set in stone, President Biden's Administration is currently looking into alternate routes to provide debt relief, such as the Higher Education Act. The Supreme Court released the syllabus of the ruling if you'd like to read more.

Outside of the highly popularized loan forgiveness plan that is in limbo, there are several great programs to consider, including the Public Service Loan Forgiveness (PSLF). LendingTree has a fantastic deep dive into student loan forgiveness options for various careers, I highly recommend taking a look to see if you qualify.

3 steps to prepare for the student loan unpause

1. Review and update your budget asap 

Now is the time to take another look at your budget and figure out how to cover this expense. At the very least, get your plan together before your payment comes due in September, but earlier the better. If you make enough to cover this payment and some, consider paying extra each month to get out of debt faster. The longer you hold this debt the more interest you'll pay, eating away at your ability to save and invest for the future. If you are unsure if you can make the payment work in your budget, it's time to start making tough choices regarding your day-to-day expenses. Take a hard look and cut out anything that isn't necessary. Consider applying for the Income-Driven Repayment (IDR) Plan if you don't believe you'll be able to afford the payment by the time the student loan unpause happens.

If you don't have a budget - it's a great time to create one! There are many budget strategies to choose from, but my favorite to start with is the 50/30/20 budget. In a nutshell, you place all your money into three categories: 50% needs, 30% wants, and 20% savings and debt management. Ultimately your goal should be to put as much as possible into savings and debt management, but strive for 20% and continue to build from there.

2. Confirm who your service provider is and update your account

By the time the unpause ends in August 2023, it would have been 3.5 years since the pause started in March 2020. It's highly likely that you have a new loan service provider. According to the Department of Education, you can simply check your account dashboard to confirm who your service provider is, or you can give them a call. 

3. Update your account and set up automatic payments

Once you've confirmed your loan service provider, it's time to update your account. Again, it's been over 3 years. Your info may have changed as well. Ensure your contact info is up to date, including your address, phone number, and email. All automatic payment information has been cleared, so you'll need to set them back up again.  

A few final thoughts

While federal student loans typically carry lower interest rates, you may find a more favorable rate through a refinance. If you are carrying other high-interest debt such as credit cards, I would look into debt consolidation options to improve your overall financial wellness. Options include personal loans, and if you're a homeowner, home equity loans, home equity lines of credit, and cash-out refinances. Each lender has different rules around how the funds can be used, read the fine print before signing the dotted line.

As with everything in life now, beware of student loan scammers. With the unpause rapidly approaching, these lowlifes will use the confusion to rob you of your private information. I wouldn't engage anyone that contacts you directly, especially if it's before you've established a relationship with your loan servicer. The Department of Education website allows you to confirm who's servicing your loan and how to contact them.

If you want to get ahead financially, you need to get out of debt. Period. Make the sacrifices now to reap the rewards later - your future self will thank you.