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As of mid-March, the September 30 deadline for student debt relief outlined in the CARES Act may have seemed a long way off. Now that the date is fast approaching, what will happen to your student loans?
The answer: relatively little.
The Ministry of Education and its loan officers have announced more guidance in recent weeks on how they will implement President Trump’s Executive Order suspend student loan payments until the end of the year. Not much will change in the coming months, which is good news for tens of millions of borrowers whose payments have been deferred and interest rates set at 0% for the past six months. Consumer advocates had warned that there would be unprecedented levels of defects and failures without the prolonged relief.
“It’s just one less thing families have to worry about right now,” says Rob Bertman, consultant with The Student Loan Planner, which advises six-figure student loan borrowers on the best repayment strategies.
Here’s a breakdown of everything you need to know about the current state of federal student loans.
Who is entitled to the relief?
Much like the CARES Act, Trump’s memorandum puts most federal student loans on hold. Eligible borrowers – the vast majority of those who have taken out loans in the past decade – will automatically be forborne without penalty, including those enrolled in income-driven long-term repayment plans and forgiveness participants. public service loans.
The only exceptions are older loans provided through the Federal Family Education Loan Program and loans issued through the Perkins Loan Program. Many of these loans are managed by the federal government, but held by private banks. If you have a FFEL or Perkins loan that is not federally owned, you have the option of consolidating either into a direct consolidation loan, which is then eligible for the 0% interest rate. But the catch is, once the 0% interest period is over, you could end up with a interest rate you are currently paying and any unpaid interest you currently have will be capitalized or added to the principal balance.
Private student loan borrowers are not eligible and will need to continue making payments as usual. If you have private loans and you’re in a hurry, most lenders offer some form of forbearance, but not on the same generous terms as the government. It may also be possible to reduce your monthly payments during the pandemic by refinancing a private loan.
“Private borrowers can refinance their longer-term loans, so if they are currently ten-year, they can make it 20-year to temporarily reduce payments,” says Bertman.
Be aware, however, that private borrowers should ultimately start repaying their debt more aggressively once they are in a better financial position, so that they are not forced to pay more interest.
What if my loans are in default or are in collection?
The CARES Act suspended collection of delinquent student loan payments, but it was unclear at first whether or not Trump’s executive order would extend this provision. Ultimately, the memorandum will continue to follow the guidelines of the CARES Act and all forms of collection, including wage garnishment, withholdings on income tax returns, and withholdings on Social Security, will be suspended until. after December 31, according to the Department of Education.
What if I expect my debt to be canceled?
Those enrolled in forgiveness programs like the aforementioned Long Term Income Based Repayment Plans and the Public Service Loan Forgiveness Program will still be able to count the next three months for their forgiveness, even if they don’t pay. their loans.
This means that borrowers working for the PSLF, for example, essentially get nine free months counted towards their ultimate forgiveness, as long as they continue to meet other program requirements.
Do I have to do anything to make this temporary break and interest reduction apply to my loans?
No. Since these changes were first announced at the end of March, the Education Department has automatically reduced the interest rate on all federal loans they hold to zero and ordered services like Nelnet and FedLoan to suspend. all monthly payments.
On the flip side, if you already have the wherewithal and a strong safety net, it’s actually a great time to keep paying off your loans if they’re not already on track to be canceled. Since the interest rate on federal loans is 0%, any money you currently pay will go toward the principal amount owed, reducing the length of time you have to keep paying.
Another option, Bertman says, is for borrowers who already have a healthy emergency fund to set up a second savings account with the goal of putting money aside to further reduce their debt just before it ends. of the abstention period. The benefit of this is twofold: It can save you a few more months to see what the economic outlook is before you decide to use the money as additional emergency savings. and gives you the flexibility to allocate a larger lump sum to your loans than you might under normal circumstances.
Will my debt be worse than where I left it if I don’t pay by December?
If you’ve consistently made your monthly payments on time and before the pandemic, you won’t see any difference in the total you left in March when your next payment is due in January.
However, if your loans were in a form of default or forbearance where unpaid interest would normally be capitalized, interest accrued before March 13 (the date the Department of Education initially suspended payments and collections) will be added to your main balance come January 1st. This means that you will essentially be paying interest on your previously unpaid interest.
Can I get a refund on payments I make between March 13 and December 31?
Yes, there is no penalty for requesting reimbursement for payments you made for your federal loans during the forbearance period. If you decide to spend more money on an emergency fund, or if you need more money due to financial hardship, you can request a refund through your service provider.
Will there be other laws that could affect my current loans?
Since September 11 no coronavirus relief bill has been passed in the Senate, since ifirst set of legislative measures passed during the first months of the pandemic.
You may have heard that progressives in the House and Senate have been pushing to use the coronavirus crisis as an opportunity to tackle student debt by canceling most, if not all, federal student loans, but it is unlikely that this plan will materialize soon. The HEROES Act, a $ 3 trillion stimulus package that included a pardon of up to $ 10,000 in federal and private student loans, was passed by the House in May but has been described as “dead on arrival” by President Trump.
Most likely, your loan payments will just stay on hold until the end of December, when borrowers will need to start repaying them as usual.
Refinancing your student loan at a lower rate could save you money and allow you to pay off your loan faster.
Begin the process of checking your rate on Credible – select your state below.
