Federal Student Loan Borrowers Face Final Notice: Act Fast to Choose a Repayment Plan

Government Issues Final Notice to Student Loan Borrowers

Millions of federal student loan borrowers are receiving warnings labeled as ‘Final Notice’ as the government phases out the previous SAVE repayment plan. Borrowers are urged to choose a different repayment option within 30 days before their loans automatically shift to a fixed-payment plan.

Save Plan Transition

This development follows the Department of Education’s decision to end the Saving on a Valuable Education (SAVE) plan after a federal court order in March. Servicers began sending notices on July 1, giving affected borrowers 90 days to select a new plan. Those who do not act during this period now face a final notice providing an additional 30 days.

“That final notice is basically the government saying, ‘Choose your repayment plan, or we’ll choose one for you.’ And borrowers probably won’t like the choice,” explained Michael Ryan, finance expert and founder of MichaelRyanMoney.com to Newsweek.

Importance of Choosing a New Plan

If borrowers fail to act, their loans will automatically enroll in a fixed-payment plan, potentially leading to significantly higher monthly payments. More than 7 million borrowers previously enrolled in SAVE, where payments were based on income and family size. The Education Department’s guidance regarding transitioning from SAVE was issued to 7.5 million borrowers.

Federal Student Aid alerts borrowers that the Standard or Tiered Standard plans may result in higher payments compared to income-driven repayment plans.

Understanding the ‘Final Notice’

Experts indicate the final notice serves as an additional warning after the termination of the SAVE plan. Servicers commenced notifications in waves starting July 1, granting borrowers 90 days to elect a new repayment plan. Those reaching the deadline might find they are given another chance to act.

Alex Beene, financial literacy instructor from the University of Tennessee at Martin, shared to Newsweek, “For nearly two years, borrowers who were repaying under the SAVE plan had their accounts in forbearance as the plan faced legal challenges in court.”

With the plan’s phase-out complete, borrowers must swiftly choose a new repayment option.

Consequences of Inaction

Failure to choose a plan leads to automatic placement in either the Standard or Tiered Standard Repayment Plan, dependent on loan disbursement dates. This change may entail higher costs, yet ignoring loans poses a greater financial setback with potential credit score damage.

Beene stated, “While new repayment options may be more expensive, ignoring loans risks greater harm, such as damaged credit or garnished wages. It’s a tougher situation given current affordability struggles, but the impact on credit and wages outweighs temporary discomfort from increased payments.”

Guidance if You Receive a Final Notice

Ryan advises against ignoring the notice. Instead, promptly check eligible repayment plans and carefully consider options before the deadline. Automatic enrollment might not be the optimal choice, especially if aiming for loan forgiveness.

Federal Student Aid’s Repayment Calculator is available online to explore eligible plans, estimate monthly payments, and overall costs. Ryan highlights that ignoring the notice doesn’t lead to immediate default but likely results in a shift to a fixed payment plan with higher monthly bills.

Available Repayment Options

Borrowers’ options vary based on loan specifics and circumstances. Current options include Income-Based Repayment, Income-Contingent Repayment, Pay As You Earn, and the newly introduced Repayment Assistance Plan (RAP) effective July 1, alongside fixed-payment plans.

The Standard plan generally aims to repay loans within 10 years (or longer for Direct Consolidation Loans), while Tiered Standard targets Direct Loans over periods ranging up to 25 years depending on borrowed amounts.

Kevin Thompson, CEO of 9i Capital Group, told Newsweek, “Failing to act may result in auto-enrollment into a pricier plan, raising defaults and intensifying financial burdens.”

Support in Case of Affordability Concerns

If unable to afford the new payments, borrowers have alternatives. Income-based plans may lower payments, especially for low-income or larger families.

The National Consumer Law Center advises contacting loan servicers promptly to explore other repayment options like temporary forbearance or deferment.

Thompson noted, “This situation is challenging, and professionals can aid in determining the best action plan.”

Next Steps

Missing the final deadline does not mean immediate default. However, borrowers will be auto-enrolled in a fixed-payment plan, establishing a monthly payment requirement under the new terms.