US President Joe Biden is expected to sign the Biden-McCarthy debt ceiling plan on Saturday to protect the United States from a default crisis. The Senate voted to pass the plan Thursday night, a day after the House passed the bill with bipartisan support.
“Passing this budget deal was critical,” Biden said Friday night during his first prime-time address from the Oval Office. “The stakes couldn’t be higher.
While the deal is aimed at raising the debt ceilingalso includes changes to public programs such as medical care for veterans and food assistance for low-income households. The deal would also end a freeze on federal student loan payments that began during the COVID-19 pandemic.
The bipartisan deal requires student loan borrowers to begin paying off their loans as soon as August 30. Although this time frame was part of the president’s plan laid out last November, there is no longer any doubt that borrowers will have to start paying their loans again. The text in the deal prevents the education minister from initiating another pause.
More than 43 million Americans owe a total of $1.73 trillion in student loan debt, according to the Federal Reserve. The average amount owed is $37,338 and the average monthly payment is $337. Student loan debt is a growing problem as younger borrowers find themselves financially burdened by their payments, which prevent them from proceeding with major life events such as getting married or buying a home.
Here’s how the debt ceiling deal will affect student loans and what you can do to prepare for repayment.
What will happen to student loan borrowers if the debt ceiling deal is approved?
The text of the debt ceiling agreement states that borrowers will have to resume paying their student loan bills 60 days after June 30, the date originally set by President Joe Biden last November. This will officially end the student loan freeze that was started by President Donald Trump at the start of the COVID-19 pandemic.
The deal passed the Senate on Thursday and the House the day before. In an Oval Office address Friday night, Biden called the deal critical and said the stakes could not be higher. He is expected to sign the bill into law on Saturday.
The agreement limits the U.S. Department of Education from reinstating another pause, meaning Congress would likely have to approve such a move. Education Secretary Miguel Cardona testified before the Senate last month that there would not be another recess before June 30.
That means borrowers will have to start paying off loans as soon as August 30, and interest on student loans can pile up again. The exact timing of your first payment will depend on the loan servicer and the repayment plan you have agreed to.
Will there be student loan forgiveness?
Not under the debt ceiling deal. There is a caveat, however, that if Biden’s student debt relief program is approved by the Supreme Court, the repeal will continue unabated.
Last August, Biden announced a plan to forgive up to $20,000 in student debt for those who qualify. The move received two legal challenges, arguing that the cancellation exceeded the authority of the Education Minister. The Supreme Court must rule on the matter by the end of June.
How to prepare for student loan repayment.
Since student loan payments will likely start again in less than three months, there are some things you can do now to prepare.
If you have savings set aside for a student loan payment, a good option is to take advantage of a high-yield savings account. Open an account and deposit money intended for student loans. The money will pile up thanks to higher interest rates, some as high as 4.85% APR.
If you have existing high-interest debt, such as credit card debt, work to pay off your balances or consolidate your debt into a more affordable monthly payment before your student loans are reset. A debt consolidation loan can help you consolidate a higher interest variable debt into a lower interest fixed rate payment and is useful if you need a few years to pay off your debt. But if you just need a few extra months to pay off your debt, a balance transfer card can offer you a temporary interest deferment while you work to pay off your balance.
Both options can help put you in a better financial position before loan payments start again.
Still worried about your student loan repayments?
If you have concerns about repayment, it is imperative that you speak with your loan servicer.
There are options to change the repayment plan to something more affordable or to defer payments for a period of time.
The Department of Education’s student aid website also has information on various payment plans, such as income-based repayment plans and loan consolidation options.