What to Know About the Expiration of Federal Student Loan Relief
Update: On August 8, 2020, President Trump announced four executive actions impacting taxes, student loans, unemployment, and housing for renters and homeowners. For more details on these actions and what they could mean for your finances, read our summary here.
When Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act back in March, lawmakers built in several provisions to help federal student loan borrowers.
Most notably, the Act placed eligible loans offered by the U.S. Department of Education into forbearance , suspending payments for six months. It also set interest rates for that same period at 0%. And it pressed pause on collection actions and wage garnishments for borrowers who have defaulted on their federal student debt.
But time is running out on that temporary break, which only goes through Sept. 30. Unless Congress passes a new relief package that extends those benefits—and President Trump signs it—federal student loan payments and interest are set to resume in October.
Could There Be an Extension?
The CARES Act provided a welcome breather for borrowers who have been financially impacted by the coronavirus pandemic. According to the Student Debt and COVID-19 Survey (released in May by the advocacy group Student Debt Crisis and fintech startup Savi), 33% of respondents who have federal student loans said they already were struggling to afford their monthly payments before the pandemic, while 46% said they expected to struggle when the federal relief ends.
Congressional leaders and White House officials have signaled that another stimulus package could be on the way soon. In mid-July, Treasury Secretary Steven Mnuchin told the House Committee on Small Business that there would be “bipartisan conversations about supplemental relief legislation,” and that he hoped Congress would pass another package by the end of July. “We anticipate that additional relief will be targeted to certain industries, smaller businesses, and lower- to middle-income families that have been especially hard-hit by the pandemic,” Mnuchin said in his statement . “Our focus will be on jobs and getting all Americans back to work.” He did not discuss student loan debt, however.
Lawmakers recently returned to Washington from a summer break, and both the House and Senate are expected to look at proposals for continuing and/or bolstering economic relief. But it’s unclear what the next relief package might include, or whether the federal student loan benefits currently offered by the CARES Act will be extended.
Even if student loan relief is extended, it might be for just another month, six months, or maybe a year—it’s impossible to predict. Which means borrowers may want to come up with a plan now for how they’ll deal with their payments when they do start up again.
What’s on the Horizon?
So, besides keeping an eye on what Congress is up to, what are some things federal student loan borrowers might look for in the coming weeks and months?
Loan Servicers Should Start Reaching Out
The CARES Act states that starting Aug. 1, lenders will be required to provide federal student loan borrowers with at least six notifications that include both the date payments will restart and information on how to enroll in one of the federal government’s income-driven repayment plans. The notices may come by phone, mail, or email, so borrowers may want to check to be sure their loan servicer has up-to-date contact information.
(Borrowers who want to get a jump on researching federal repayment plans can explore their options with a SoFi quiz or head to the Department of Education’s Federal Student Aid site and check out its Loan Simulator.)
Payments Are Set to Resume Oct. 30
If the government doesn’t come up with an extension, the CARES Act’s forbearance period will end on Sept. 30, and interest on federal loans will begin accruing again. Loan payments are set to resume on Oct. 30. (Again, lenders should be sending notices that verify this first payment date.)
Borrowers who wish to resume their payments before the designated date may do so. Because the student interest rate on federal student loans is set at 0% until Sept. 30, any payment made before that time should go directly toward the loan’s principal, which could help pay off the loan faster and reduce the overall cost of the loan. So borrowers who feel they are on steady financial footing and won’t need the money to make ends meet may choose to contact their loan servicer and ask about restarting their automatic payments a bit early and double-checking that payments will be applied to the principal balance.
Forbearance Means Paying Longer
The CARES Act’s forbearance provision didn’t make student loan balances go away. (In relationship terms, it was a break, not a breakup.) Federal student loan borrowers who took the full six-month forbearance period offered by the CARES Act can expect to make the same payment they did before the suspension, and their loan payoff date will be pushed back six months.
There is an exception, however, for borrowers who are currently on an income-driven repayment plan: Their suspended payments will be counted toward their plan’s forgiveness qualification. Those who are working toward Public Service Loan Forgiveness (PSLF) may also receive credit for their suspended payments if they have a federal Direct Loan, were on a qualifying repayment plan before the forbearance period, and worked full-time (at least 30 hours) for an eligible employer during that time. But if a borrower was laid off, furloughed or had their time cut to fewer than 30 hours per week—a very real possibility during the pandemic—the suspended payments won’t count toward PSLF.
Help When CARES Relief Ends
When the CARES Act’s forbearance period ends, federal student loan borrowers who continue to struggle financially may find they still have options for pressing pause on their payments.
Borrowers may be able to request a deferment or forbearance (which is different from CARES Act forbearance) through their loan servicer and receive a temporary suspension or reduction in payments.
There are pros and cons to deferment and forbearance. Both have specific eligibility requirements and place limits on the length of time they can be used over the life of a loan. And again, that loan isn’t going away—both deferment and forbearance are just ways of kicking the can down the road with the hope that things will look better financially in the future.
The main advantage to a deferment is that federal student loan borrowers don’t have to pay the interest that accrues if they have a federally subsidized loan (including Direct Subsidized Loans, Subsidized Federal Stafford Loans, Federal Perkins Loans, and subsidized portions of Direct Consolidation Loans or FFEL Consolidation Loans.) However, borrowers still have to pay interest if they defer Direct Unsubsidized Loans, Unsubsidized Federal Stafford Loans, Direct PLUS Loans, FFEL Plus Loans, and unsubsidized portions of Direct Consolidation Loans and FFEL Consolidation Loans.
Under forbearance, it doesn’t matter what type of federal loan they have, borrowers must pay any interest that accrues even though they’re not making loan payments. Borrowers can pay the interest as they go through the forbearance period or have it capitalized (added to the principal) at the end of the period, which could result in a larger payoff amount.
There are several types of deferments, including economic hardship and unemployment deferments, which may help federal student loan borrowers who have been hurt by the coronavirus pandemic. Similarly, a loan servicer may choose to grant a “general” (or discretionary) forbearance to a borrower who is experiencing financial problems, unemployment or some other challenge that’s making it difficult to make payments. There’s also a “mandatory” forbearance that loan officers are required to approve under specific circumstances, including if a borrower’s payments exceed 20% of their monthly gross income.
An income-driven repayment plan may be another option for those whose debt is considered to be high relative to their income. If a federal student loan borrower qualifies, the monthly payment is based on their discretionary income, and whatever isn’t paid off after 20 or 25 years (depending on when the borrower received the loan) may be forgiven. But those payments are recalculated every year based on updated information on family size and income (including income from a spouse if they’re married and filing jointly), so payments could increase as circumstances improve. And the borrower could end up paying more over the life of the loan than they would have with the 10-year Standard Repayment Plan. It’s also possible the borrower may have to pay income tax on the portion of the loan that’s forgiven.
Another Option: Refinancing
Borrowers might also want to check into the benefits of refinancing with a private lender.
A private refinancing loan is different from a federal Direct Consolidation Loan, which is offered through the Department of Education and allows borrowers to combine multiple federal student loans (and only federal loans) into a single loan with an interest rate that is based on a weighted average of prior loan rates, rounded up to the nearest eighth of a percent. With a Direct Consolidation Loan, the monthly payment may be reduced, but if it is, it’s likely because the length of the loan has been made longer, which means the borrower could pay more interest over time.
When student loan borrowers refinance their loans through a private lender, the lender pays off their old loan balances—both federal and private—and issues one new loan with new (and hopefully better) terms. Those with a solid credit history and a positive financial outlook may qualify for a lower interest rate than their current loans, and that could mean significant savings over the life of their refinanced loan.
It’s important to note, though, that by refinancing federal student loans, borrowers will lose the benefits and protections built into their federal loans, including income-driven repayment, forbearance, and deferment when they experience economic hardship. (Some private lenders, including SoFi, offer unemployment protection for qualifying members, but those and other benefits vary from one lender to the next.) Borrowers who are working toward PSLF, or who find that federal repayment plans better suit their circumstances, may choose not to refinance, because those programs won’t transfer to private refinance loans. A Direct Consolidation Loan may be the right alternative for them.
Those who are interested in what refinancing with a private lender might do for their payments can easily research what different lenders have to offer. Some lenders allow potential borrowers to pre-qualify for a loan in order to determine if they’re eligible for more favorable terms than they have with their current student loans—either with a better interest rate, a shorter loan length, or both. With SoFi, for example, interested applicants can pre-qualify online in minutes.
Focusing on the Future
With all that’s going on in the world right now, it may seem difficult to think past what’s happening today or next week, much less to worry about long-term financial goals. But with a little research and proper planning, student loan borrowers may find they are better prepared to stay on track—or get back on track—toward their future goals as they weather the current crisis.
Check out what refinancing might look like with SoFi.
SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
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