Financial advisors share insights on the new SAVE plan and how to integrate student loans into your financial strategy as payments restart.

For the 43.6 million borrowers with federal student loans on hold during the pandemic, repayment resumes in October, whether you graduated last year or a decade ago.

Student loans can strain your budget, but there are strategies to ease the financial impact. Here’s what you need to know before jumping back into repayments.

Is There Any Flexibility with Resuming Student Loan Payments?

You may have heard about a “grace period” or “on-ramp” for those returning to repayment. Understanding this concept is crucial.

“While there is a 12-month on-ramp, it only prevents negative reports to credit bureaus and collection agencies,” says financial expert Mark Kantrowitz. “After this period, if you haven’t made payments, your loans could go delinquent or into default.”

Essentially, this grace period acts as a cushion—interest continues to accrue, so it shouldn't be seen as a free pass to skip payments for a year. It simply protects your credit from being harmed by missed payments, which can affect your finances for years.

What Steps Should I Take When Payments Start Again?

As student loan payments resume, the first task for borrowers is to visit the Federal Student Aid website. There, you can find crucial information like your loan types, servicer details, current balance, and interest rates.

Next, Certified College Financial Consultant Rebecca Baldauf recommends considering consolidating federal loans. This process simplifies repayment and keeps you eligible for income-driven repayment options and potential debt forgiveness. By consolidating, you merge multiple federal loans into a single Direct Consolidation Loan. More details can be found here.

However, don't confuse federal loan consolidation with private refinancing. “We usually advise against refinancing because it removes opportunities for forgiveness and federal benefits associated with student loans,” Baldauf warns.

After reviewing and possibly consolidating your loans, it’s time to set your monthly payment amount and figure out how to accommodate it.

“Conduct a budgeting exercise by tracking your expenses for a month, categorizing them broadly,” Kantrowitz suggests. “Label each item as mandatory (needs) or discretionary (wants), and total your expenses at the month’s end.”

Assess your financial situation, and apply some of our favorite budgeting strategies to include your new student loan payment. If you find your budget is too tight even after cutting discretionary spending, consider alternative solutions.

Can I Reduce My Monthly Payments?

With an average federal student loan debt over $37,000, many borrowers face monthly payments that can be burdensome. If your loans impact your ability to cover basic expenses, Baldauf suggests exploring income-driven repayment options (IDRs) to lower your monthly obligation.

The new Saving on a Valuable Education Plan, or SAVE Plan, introduced by the Biden administration, provides advantages that previous IDRs did not. Key benefits include raising the income exemption to 225% of the federal poverty level. If you earn under $32,800 annually, your monthly payment could be zero. The plan also eliminates remaining interest after payment, excludes spousal income, and offers quicker forgiveness for some borrowers.

“If your debt is $12,000 or less, it can be forgiven after 10 years instead of the usual 20 or 25 years,” Kantrowitz elaborates. “Each additional $1,000 extends the forgiveness timeline by one year.”

Another key feature of SAVE is that payments are calculated based only on your taxable income, not gross income—this means benefits like health insurance and retirement contributions can lower your monthly calculations. (Great incentive to save for retirement!)

Baldauf adds that if you anticipate temporary financial hardship, deferment or forbearance might be options to consider until you regain stability. The aim is to minimize total interest paid over time, so avoid extended repayment plans when possible.

Once you determine if the SAVE plan suits your needs, complete the income-driven repayment form at studentaid.gov to find out your potential lowest monthly payment. Then, Kantrowitz advises reaching out to your loan servicer to set up automatic payments—this often leads to a small interest rate reduction!

Final Thoughts

The restart of student loan payments can be daunting, particularly for recent graduates or those still feeling the financial effects of the pandemic. However, with thoughtful budgeting, it's feasible to manage your loans successfully.

Empowering individuals to create effective budgets is why we launched FinanceFixx, an 8-week program aimed at enhancing your financial confidence and skills. If you’re ready to establish realistic repayment goals, we invite you to join us!