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Student loan borrowers should take these steps after Supreme Court denies forgiveness

Editor's note: This article was updated to reflect the announcements from the Biden administration.

Borrowers let down by the US Supreme Court ruling against the president’s student loan forgiveness program still must prepare to pay their monthly payments again. The Biden administration is hoping to make that easier.

The highest court in the land on Friday struck down the up to $20,000 in debt cancellation that President Joe Biden announced last year. On top of that, an estimated 40 million borrowers who had their payments paused during the pandemic must get ready for those to restart in October.

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In response, the Biden administration announced some new moves on Friday to ease borrowers into repayment and to offer another avenue for debt forgiveness. Borrowers should also be aware of other debt relief programs under the Biden administration that could get them closer to loan cancellation or help make their payments more affordable.

Here’s what to know.

WASHINGTON, UNITED STATES - FEBRUARY 28: A sign reading Cancel Student Debt is staged outside of the Supreme Court of the United States in Washington, D.C., on Tuesday February 28, 2023. (Photo by Sarah Silbiger for The Washington Post via Getty Images)
Credit: Getty Images (The Washington Post via Getty Images)

Payment pause will lift

As part of the debt ceiling deal that the White House struck with House Speaker Kevin McCarthy (R-Calif.) and passed earlier this month, federal student loan payments paused during the pandemic forbearance will be due beginning in October. Interest on those loans resumes in September. Additionally, the deal stipulated that the president can't extend forbearance again.

That means borrowers need to prepare to make those payments again.

Borrowers should go to the Federal Student Aid (FSA) website to find out who their loan servicer is and their monthly payment amounts. Borrowers should also make sure their contact information is correct on both their loan servicer’s website and in their profile, so they can receive notifications from the Education Department.

(Credit: Federal Student Aid)
(Credit: Federal Student Aid)

Auto-debit payments likely won't restart automatically for most borrowers, according to the FSA, so borrowers should opt in to confirm their auto-debit enrollment before payments restart.

FSA also recommends that borrowers use its Loan Simulator tool to find a repayment plan that meets their financial needs. Borrowers may also want to consider applying for an income-driven repayment (IDR) plan, FSA said.

Here's some relief. The administration unveiled a plan to help borrowers when they restart their paused payments in October. For 12 months, borrowers won't be penalized for late, missed, or partial payments. Borrowers don't have to take any action to qualify for the program.

The payments will still be due and interest will still accrue during the 12 months, but the interest will not capitalize at the end of the on-ramp period. Borrowers who miss payments won't be reported to credit bureaus, won't be considered in default, and won't be referred to collection agencies for those payments.

One-time adjustment

FILE - President Joe Biden speaks about the student debt relief portal beta test in the South Court Auditorium on the White House complex in Washington, Oct. 17, 2022. A sharply divided Supreme Court has ruled that the Biden administration overstepped its authority in trying to cancel or reduce student loans for millions of Americans. Conservative justices were in the majority in Friday’s 6-3 decision that effectively killed the $400 billion plan that President Joe Biden announced last year. (AP Photo/Susan Walsh, File)
President Joe Biden speaks about the student debt relief portal beta test in the South Court Auditorium on the White House complex in Washington, Oct. 17, 2022. (AP Photo/Susan Walsh, File) (ASSOCIATED PRESS)

In spite of the Supreme Court loss, some borrowers will see get some debt relief from the one-time payment adjustment, which is separate from the court's decision.

Last year, the Education Department announced it would count certain months toward student loan discharge that were previously ineligible under income-driven repayment plans, or IDRs.

The one-time payment adjustment helps to reverse some of the damage caused by loan servicers that did not properly track deferments or steered borrowers to forbearance instead of income-driven repayment plans that would have counted toward years of payment.

The adjustment to student loan accounts would go toward helping borrowers get closer to forgiveness under income-driven repayment plans, which offer discharge after 20 or 25 years of repayment, depending on the plan.

Around 3.6 million borrowers would receive at least three years of credit toward discharge as a result, according to Federal Student Aid.

The adjustment will happen automatically, unless your loans are in default or you have commercially-held FFEL loans. Default borrowers in the Fresh Start program are eligible for the one-time adjustment. Borrowers with commercially-held FFEL loans must consolidate those loans with Federal Student Aid (FSA) by December 31, 2023 to be eligible for the one-time adjustment.

Borrowers who have been in repayment for 20 or 25 years should see the adjustment to their accounts by August 1, 2023. Other borrowers will see the adjustment in 2024.

New income-driven repayment plan

When announcing the student loan forgiveness last year, the president also announced plans to reform income-driven repayment plans. The administration gave an update today on that plan.

The administration finalized the Saving on a Valuable Education (SAVE) plan, an income-driven repayment plan that the White House said will cut borrowers’ monthly payments in half, allow many borrowers to pay $0 in monthly payments, and prevent balances from growing due to unpaid interest.

The plan makes loan payments more affordable in the following ways:

  • The most borrowers must pay toward their undergraduate loans is 5% of their discretionary income, down from 10%.

  • No borrower making less than 225% of the federal poverty level will have to make a monthly payment.

  • Loan balances will be forgiven after 10 years of payments — instead of 20 years — if the original loan balance was $12,000 or less.

  • Borrowers won't be charged with unpaid monthly interest, so balances won't grow if they make their payments — even if that monthly payment is $0 because their income is low.

Student borrowers in repayment can enroll later this summer before monthly payments restart. Borrowers who sign up or are already signed up for the Revised Pay as You Earn (REPAYE) plan will be automatically enrolled in the new plan.

Ronda is a personal finance senior reporter for Yahoo Finance and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda

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