The recently enacted CARES Act provides relief for Federal student loan borrowers. It is good news for those enrolled in an income-driven repayment plan or in the Public Service Loan Forgiveness Program.
The Act suspends most Federal student loan payments and interest accrual between March 13 and September 30, 2020. Principal balances are also frozen during this six-month period.
Student loan borrowers don’t have to do anything. Loan servicers should have implemented the changes by April 10, 2020. You don’t have to make a payment until October 2020.
You can use those payments for other pressing needs such as making ends meet, building up your emergency fund (3-6 months of expenses), or paying off higher interest rate loans.
But should you stop paying until October 2020?
The answer depends on your individual situation. The following discussion looks at three common scenarios.
Borrowers Enrolled in an Income-Driven Plan
The Department of Education has a potpourri of income driven plans. These plans reduce your payment based on your income and have loan forgiveness after 20 or 25 years of payments.
The Department of Education has indicated that suspended payments during this six-month period (March 13 – September 30) “count” for the any loan forgiveness program.
Therefore, you should stop payments if your loan servicer hasn’t already stopped them. Please check that your loan servicer (e.g. Navient, etc.) actually applies the suspension correctly and doesn’t short you on months of payments.
If you’ve made a payment, say in April, then contact your loan servicer to get a refund. Please contact your servicer using their email platform to keep a record of the communications. You can also call but follow-up with an email confirmation.
If your re-certification period is between now and September 30th, then you can delay the re-certification until that time.
See this link for other common IDR-related CARES Act questions.
Remember that any forgiven debt under an IDR plan counts as taxable income in the year of forgiveness.
Borrowers enrolled in the Public Service Loan Forgiveness Program
Borrowers enrolled in the PSLFP have their loans forgiven after 120 payments. Because all PSLFP enrollees must also use an Income-Driven plan, the six months between March and September count toward the 120 total.
It makes the most sense to stop your payments during this six month period.
Please remember, however, to annual recertify that your employment counts as public service.
Borrowers in standard, extended, or graduated loan repayment plans
Certainly stop the payments if you need the money. You won’t owe any more in interest or principal on September 30, 2020 than you owe today.
It makes sense to continue to pay the loans if you haven’t been economically harmed by the downturn. The loan servicer will apply all of the payment to the outstanding principal. It is a good to chip away at your loans quicker to reduce the term.
One consideration is to make the March – September payments all at once in mid-September. This strategy makes sense because interest is not accruing until October 1, 2020. It would be as if you had made monthly payments all along. And you’ll also have access to the money that otherwise would have repaid your loans during this period.
Loans eligible for suspension
The CARES Act relief applies to all Direct Student Loans and Federal Family Education Loans (FFELs) owned by the Federal Government. Direct Student loans were issued starting in 2010.
If you took out your loan prior to 2010, then you most likely have a FFEL loan. But note that not ALL FFELs are owned by the Federal Government. Check the owner of your loans by logging into your loan servicers website to see if the loan interest rate has been set to zero. If it is not set to zero, then it is not owned by the federal government. The loan doesn’t qualify for suspended payments.
Most Perkins loans aren’t eligible for CARES Act relief. Colleges and universities, not the federal government, issue most Perkins loans. You can check the owner of your Perkins loans be logging into your loan servicer’s website.
You can consolidate your non-federal government loan with a Consolidated Direct Loan if you want to take advantage of the suspension. Congress may in the future provide more relief to student loan borrowers. Beware that you could have a higher interest rate after the consolidation. So, please be mindful of this fact.