On September 30, 2024, the American economy will reach a critical juncture, testing the financial resilience of millions of consumers. Since the onset of the COVID-19 pandemic, wages have increased by 23%, suggesting that many Americans should, in theory, have more disposable income. However, this increase in wages has done little to mitigate the financial strain on approximately 7 million federal student loan borrowers—about one in six—who are currently in default. For the past four and a half years, the U.S. government paused student loan payments and set interest rates at 0% for most federal loans, while many borrowers not included in the automatic pause relied on forbearance programs.
These protections officially ended in August 2023, when the payment pause and 0% interest rates were lifted, signaling the return to normal repayment conditions. Recognizing that borrowers might struggle to adjust, the government introduced two key relief programs aimed at easing the transition: the “On-Ramp” and “Fresh Start” programs. These initiatives offered temporary reprieve, giving borrowers time to adjust to making payments again without immediate negative consequences.
However, with both programs set to expire in September 2024, the financial reckoning for millions of borrowers is fast approaching. As payments come due, borrowers will no longer have the same protections, potentially leading to widespread financial strain. The ripple effects of these changes could be felt throughout the economy, as individuals struggle to meet their obligations without the safety nets in place.
Below is a breakdown of the two programs that are set to expire:
The On-Ramp Program
- This temporary measure extended certain protections from the COVID-19 student loan pause, providing borrowers with flexibility during the early phase of repayment resumption. While payments were technically due, missed payments did not result in late fees or negative credit reporting. This allowed borrowers to adjust without facing immediate financial penalties. However, because there were no significant consequences for missing payments, the majority of borrowers did not make any payments during this period.
The Fresh Start Program
- Designed to assist borrowers who were in default prior to the pandemic, this program provided a pathway to return to good standing. Defaulted loans were transferred from the default resolution group to a regular loan servicer, shifting the loans from “default” to “in repayment” status. Once the transfer was complete, borrowers could apply for an income-driven repayment plan, adjusting their monthly payments based on income to make repayment more manageable.
The Expiration of Student Loan Relief Programs: Four Major Consequences
As these student loan relief programs come to an end, millions of borrowers will face a return to pre-pandemic rules and stricter repayment terms. The protections offered over the last few years provided a financial cushion, but now the reality of repayment is returning for over 30 million borrowers. Below are four significant negative impacts that borrowers will face as these programs expire.
1. Missed Payments Will No Longer Count Toward Loan Forgiveness
During the pandemic, missed payments under Income-Driven Repayment (IDR) plans and Public Service Loan Forgiveness (PSLF) still counted toward loan forgiveness, as long as borrowers met the other program requirements. With the expiration of relief programs, missed payments will no longer be credited toward loan forgiveness. Borrowers who fall behind will lose valuable progress toward reducing or eliminating their loan balances through forgiveness programs, further extending their time in debt.
2. Late Fees Will Be Reinstated
Starting in October 2024, borrowers who miss their student loan payments will once again be subject to late fees. While these fees might seem minimal—for example, $10—they can quickly accumulate if payments are missed over multiple months. Compounding late fees increase the total amount owed, making it more expensive for borrowers to catch up and avoid default.
3. Negative Credit Reporting Will Resume
One of the most significant consequences of the expiring protections is the resumption of negative credit reporting for missed payments. Even a single missed or late payment can severely impact a borrower’s credit score, affecting their ability to secure loans, rent an apartment, or pass a background check for employment. Loan servicers are allowed to report missed payments to credit bureaus after just 30 days of delinquency, meaning borrowers must remain vigilant to avoid substantial financial repercussions.
4. Collections and Default Penalties Will Return
When borrowers fail to make payments for 270 days, they will once again be considered in default on their federal student loans. This opens the door to aggressive collection efforts, including wage garnishment, tax refund interceptions, and seizure of certain federal benefits like Social Security. In extreme cases, the government may litigate to seize other assets. Defaulting borrowers will also face significant collection fees and penalties. As interest continues to accumulate, these added costs can cause loan balances to grow rapidly, making it even harder for borrowers to regain financial stability.
Legal Challenges Threaten Future of SAVE and IDR Programs
The legal battle over student loan forgiveness under the Biden administration’s Saving on a Valuable Education (SAVE) plan is reaching a crucial stage for millions of borrowers. Introduced as part of income-driven repayment reforms, the SAVE plan aimed to lower monthly payments, reduce interest accumulation, and accelerate the path to loan forgiveness. Over eight million borrowers have either enrolled in or been automatically transitioned to this program from other IDR plans.
However, the future of the SAVE plan is uncertain due to ongoing legal challenges. In August, the 8th Circuit Court of Appeals issued an injunction following a lawsuit led by several Republican-controlled states. This decision has temporarily halted the implementation of the SAVE plan, forcing millions of borrowers into forbearance while the case moves forward. The legal dispute has broader implications beyond the SAVE plan, potentially impacting the overall landscape of student loan forgiveness under other IDR programs.
The court has also indicated it may lean toward the argument that the Higher Education Act does not permit student loan forgiveness after 20 or 25 years of payments under certain IDR programs. If this interpretation is upheld, it could significantly impact—or potentially eliminate—key programs such as Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), and Income-Contingent Repayment (ICR). A hearing is set for October 24, 2024, with a written decision expected soon after. One must wonder whether the justices, beyond the legal arguments, are also considering the broader consequences of canceling programs that millions of borrowers have depended on to erase their debt after more than two decades. The resulting disillusionment with the federal government could be profound.
Financial Progress Stalled by Mounting Student Loan Burdens
While the full economic impact of these changes remains uncertain, it is evident they will have serious negative consequences for the American economy. Student loans represent the second-largest form of consumer debt in the U.S., with over $1.7 trillion outstanding. The end of relief programs could deliver a significant blow to both individual financial health and the broader economy. In my practice, I’m seeing that many borrowers are finally making meaningful progress toward their financial goals, sharing sentiments like, “I’m just now starting to get back on my feet.” Unfortunately, these new policies are likely to damage millions of credit reports at a time when individuals are receiving promotions and saving for homes. With the Federal Reserve beginning to lower interest rates, mortgage rates are expected to drop, making homeownership a key priority for many. However, the impact on credit scores from student loans, coupled with the strain of restarted student loan payments on mortgage underwriting, may put that goal out of reach for countless borrowers.
Strategic Approaches to Discharging Student Loans in Bankruptcy
Steven J. Grace, an experienced Illinois student loan attorney, can guide borrowers through the complex process of discharging federal student loans via the adversary process. This legal procedure involves a court review during an adversary proceeding, where he will draft and submit a student loan attestation, providing the necessary evidence to demonstrate that your federal student loans qualify for discharge in bankruptcy. While discharging private student loans can be more challenging, he may also be able to assist, depending on your unique circumstances. Pursuing this solution requires filing for bankruptcy, a serious decision that must be carefully considered. Contrary to popular belief, student loans can be discharged in Chapter 13 as well, but it requires a nuanced and strategic approach.
Given the current strength of the economy, with wages up, unemployment down, and many homeowners holding significant equity, some individuals may not qualify for bankruptcy or may be hesitant to file. Many do not qualify for Chapter 7 bankruptcy due to over median incomes, and the equity in their homes can complicate decisions around filing for Chapter 13 due to the Chapter 7 liquidation rules.
If you meet the qualifications for bankruptcy and are willing to take this step, now is the time. The sooner you file and discharge your student loans, the sooner you can move on to financial freedom. You can even secure a mortgage within two years of filing for bankruptcy with a credit score of 650. Schedule your consultation with Steven J. Grace today and take the first step toward resolving your student loan debt.
