With the President's signing of the CARES Act, student loan debt relief was provided for potentially millions of borrowers. From now until September 30th, the payments and interest on federally held loans will be waived. But there are some important aspects of these provisions that everybody who has student loan debt needs to be aware.
What You Need To Know
- What loans are eligible? Federally held student loans include all types of Direct Loans (Direct Unsubsidized, Direct Subsidized, Direct Parent PLUS, Direct Grad PLUS, and Direct Consolidation Loans) are eligible. Unfortunately, the CARES act provided no relief for private loans, commercially-held FFEL loans, or Perkins loans. Perkins loans are not federally held as they are "campus-based".
- What you need to know about FFEL Loans: FFEL loans are types of loans that were issued before 2010. So if you never borrowed before then, you don't have to worry about this. But if you did, for the purposes of the CARE ACT, you have to determine if your FFEL loans are commercially-held or privately held. Commercially-held loans FFEL loans were issued by banks and private lenders. These are not eligible. However in the past, the federal government has acquired some FFEL loans from these lenders, which means they are now owned by the Department of Education and these ARE covered by the CARES Act.
- Your qualifying loan payments should stop AUTOMATICALLY: According to the CARES act as it was signed into law, eligible borrowers do not have to take action for their qualifying loan payments to be put on hold. NOTE: At the time of this writing student loan servicer websites have not been updated to reflect this information and this is causing some confusion. For example, if you are attempting to qualify for PSLF, your federal loans are serviced by FedLoan Servicing. Their website still gives information about the older version of the CARES ACT that stated borrowers had to proactively ask to be placed on forbearance. This is inaccurate. Please also note that it is yet to be determined whether or not these loan servicers will get caught up to speed before your next auto-draft. Based on their track record, I would not be surprised if you did see your next auto-pay still go through, and then see the servicers issue a refund at some point down the road if you request one. If you want to make sure this doesn't happen, you can proactively log in and cancel your auto payment. But you better set a calendar reminder to restart it at the end of September.
- Your suspended payments will still count towards federal loan forgiveness including PSLF. You still have to have qualifying full time employment. (If you are aiming for PSLF then you should be 100% sure that you meet all the qualifications). This is another amendment to the original version of the CARES act which has created some confusion. I don't have a ton of faith in the loan servicers getting this right initially. What I recommend is that you submit a new employment certification form after September which will force FedLoan servicing to recalculate the number of qualifying payments you have made. This way you can verify these suspended payments did in fact get credited towards PSLF.
- Interest is also waived: Interest will not accrue on the principal balance of your eligible loans during the waiver period.
- Borrowers in default will have their six months of suspended payments count towards the nine months needed for loan rehabilitation. This is a big win for those in default as normally the rehabilitation process requires 9 months of payments.
- You first need to determine what types of loans you have. You can verify this by going to studentaid.gov and accessing your federal loan file. Any loan that has the word "Direct" qualifies. For FFEL loans, you need to look at who is listed as the "Current Holder". If it says "Department of Education" it is covered.
- Next, consider if you should continue making payments during this six month suspension period. If you are confident you will qualify for PSLF, you shouldn't make payments because all you are doing is taking money out of your pocket to pay down a loan balance that will ultimately be forgiven anyways. However if you aren't targeting PSLF, you have some options to consider. If you don't owe any accrued interest on your federal loans you can keep making payments and those will be applied to pay down your principal. This would save you money on total interest paid over the life of the loan. It's important to note though that these payments would only pay down principal if you don't owe any accrued interest. Many people who are on income-based repayment plans do in fact owe accrued interest so you need to be aware if this applies to you.
- If you are not going to continue to make payments to pay down principal, you should use the savings to boost your emergency fund. If you already have a sufficiently funded emergency fund (covers 6 months worth of living expenses in a single income household and 3 months in a dual income household), now is a great time to be contributing more money into your retirement accounts since the recent market selloff has priced investments on sale. I'm not a market timer, and nobody really knows when the markets will officially bottom out, but I do know investments can be bought for a lot cheaper than they were two months ago. If you are young, and have years to go before retirement, you should increase your 401(k) or 403(b) contributions, or put those savings into a Roth IRA. If your income is too high to qualify for a direct Roth IRA contribution, you can consider a Back Door Roth IRA. You should also consider doing the same thing with any stimulus money you receive in the next few weeks.
As you can see, the CARES Act was a big win for some student loan borrowers, and not so much for others. It just depends on what types of loans you have and your financial situation. The entire student loan debt environment was already complex enough with all of the various rules and regulations when it comes to what payment and forgiveness options people qualify for. The CARES Act provides a little bit more complexity, but also opportunity. If you would like to learn more about how we help people choose the best repayment strategies, schedule a free chat with us.