The new coronavirus has caused an unprecedented situation in our country. Not only are people confined to their homes, but also many have been laid off or lost their income. The financial effect for some can be devastating, and if you find yourself afraid of falling behind on bills, you are not alone.
The good news is that in March of 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law to provide emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic.
You might also wonder what this unique situation will do to student loan interest rates in the future. What happens if you miss payments now? Will rates go up or down in the near future? Is it time to consolidate?
This article will give you an overview of the current student loan landscape in the face of COVID-19 and help you determine what, if any, steps you should take to maximize your financial well-being or take advantage of rate drops.
How the CARES Act Applies to Federal Student Loans
Section 3513 of the CARES Act provides temporary relief for federal student loan borrowers. There are four primary ways in which this act applies to these loans:
- All federal student loan payments are suspended through Sept. 30, 2020 (meaning you don’t have to make any payments).
- No interest will accrue on the loans during the period of suspension (this is like having a 0% interest loan during this time).
- Even if you don’t make payments, each month during the suspension period will be treated as though you did (this is important for those participating in loan forgiveness programs, which require 120 consecutive payments, and for those worried about the possibility of having nonpayment reported to consumer agencies).
- During the suspension period, all involuntary collection of past due payments are suspended (so you can’t have your wages garnished or have loan payments taken from tax refunds or other federal benefits).
The effective start date of this legislation is March 13, 2020. If you made a student loan payment after that date, you can request to have it refunded if needed.
Which Loans Are Covered Under the CARES Act?
Loans covered include:
- Direct Loans (even if in default)
- Federal Family Education Loan (FFEL) Program loans (even if in default)
- Federal Perkins Loans
It’s important to note that some FFEL Program loans are owned by commercial lenders and not the federal government, and some Perkins Loans are owned by the institution you attended. If either is the case, those loans are not eligible for suspension.
You do have the option, however, of consolidating these loans into a Direct Consolidation Loan, which would be eligible. Whether this is a good idea, however, depends on what the interest will be on the consolidated loan after the 0% interest period ends.
If you are unsure if your loans are owned by the federal government, you can log into studentaid.gov and check. Private loans are NOT covered under the CARES Act, as the Department of Education has no jurisdiction over private lenders.
How Does the CARES Act Work? Do I Need to Do Anything?
You do not need to contact your loan servicer or do anything for your federal loans to become suspended. This happens automatically. Your interest rate will be set to 0%, no payments will be due, and any auto-payment you have set up will also be suspended during this period.
If you made a payment after the March 13 effective date, you can contact your loan servicer to have it refunded if you need the extra money right now.
If you do want to continue payments during this period, however, you need to either contact your servicer to ask for auto-payment to continue or send in payments manually each month.
How Nonpayments Count as Payments
There are many situations in which you do not want to miss a month of payment on your student loans. For example, if you had been in default and are on a payment rehabilitation program, it may be required that you not miss a payment to remain in good standing.
The Public Service Loan Forgiveness (PSLF) program also requires that borrowers make 120 consecutive minimum payments to have their remaining balance at the end of that period forgiven.
The good news is that the way the CARES Act is designed, each month of the administrative forbearance counts as if you actually made a payment even if you didn’t. So, you don’t have to worry about trying to keep your streak of payments going if you can’t afford to.
You can think of it as though your minimum required payment is $0 during each month of the forbearance, and it is automatically assumed you made it.
What Can I Do If My Loans Aren’t Covered Under the CARES Act?
Loans not covered under the CARES Act include:
- Federal Family Education Loan (FFEL) Program loans made through a private lender
- Perkins Loans made through your institution
- Private loans
As mentioned previously, FFEL and Perkins Loans can be consolidated into a Direct Consolidation Loan, which would then be covered under the CARES Act. Before consolidating, however, make sure you compare the current interest rate of the loans with the interest rate after consolidation and after the 0% period ends. If the consolidation has a higher interest rate, you could end up paying more in the long run.
While private student loans are not covered under the CARES Act, many private lenders and some institutions that hold Perkins Loans are offering their own form of relief. If you are concerned about your ability to pay your loans, contact your servicer and see what arrangements are possible. Given the unique situation the country is in, you might find that options are available that weren’t there before.
For example, Sallie Mae, one of the biggest names in the business, has a whole page on their website about coronavirus concerns, as does Discover, Citizens Bank, and many others. If in doubt, check the website of your lender and see what they are offering in the way of relief. You may be able to refinance your current loan at a much lower rate or obtain temporary forbearance.
How Long Will Abatement Last? Is It Likely to Be Extended?
The current federal loan abatement period is effective from March 13 until Sept. 30, 2020. Sometime in August, you can expect to be notified of payments being due again soon.
It is possible, however, that the period of suspension may be extended as it draws near its end. Whether this happens depends on a lot of uncertainties, so a clear prediction cannot currently be provided. If you still have difficulty paying your student loans after the period of suspension, however, you can contact your loan servicer to adjust your payment plan or apply for additional forbearance.
Federal Student Loan Interest After the CARES Act
Federal student loan interest rates are fixed at the time you take out the loan for the lifetime of the loan. These rates are set each year based on the 10-year treasury note auction results in May. The rate from the auction result is added to a base rate of 2.05% on undergraduate loans, 3.60% on graduate loans, and 4.60% on PLUS loans.
The rate on student loans for the 2019-2020 academic year was 4.53% for undergraduate loans, 6.08% on graduate loans, and 7.08% on PLUS loans.
If the numbers from the April 7 10-year treasury note auction were to be used, a mere 0.782% would be added to each of the base rates. If we assume the May results will be similar to April, this means federal student loan rates for next year could be as low as 2.832% for undergraduate, 4.382% for graduate, and 5.382% for PLUS loans, which is a historic low.
In summary, you can almost certainly expect federal loan interest rates to drop, and rather significantly at that.
Private Student Loan Interest Rates
Interest rates on private student loans are a little trickier to predict. When you take out a private student loan, the rate you get is, in part, based on your credit history in addition to current trends.
Private lenders also offer fixed rate loans or variable rate loans, with rates that may be tied to the London Interbank Offered Rate (LIBOR), the prime rate, or treasury bill rates. As such, if federal interest rates are expected to drop, it is likely that rates offered by private lenders will as well.
If you have a fixed interest private student loan, then nothing will change, but any variable interest rate loans you have might see a nice drop soon. As well, new loans taken out may be able to be borrowed at lower rates.
Is Now a Good Time to Consolidate or Refinance?
With rates likely dropping, and possibly by a lot, you might wonder if now is a good time to consolidate your student loans. The answer is maybe.
If you have federal loans that you want to consolidate into a single federal loan, your new interest rate will be the weighted average of your current rates, rounded up to the nearest eighth of a percent, so it won’t likely make much of a difference.
Since your federal student loan interest rates on any outstanding loans will revert back to their previous fixed amounts after the CARES Act period ends, it might be possible to get a lower rate by refinancing through a private lender. Make sure you are informed, however, about the difference between federal loans and private loans. For example, only the former is covered under the CARES Act at a national level at the moment, although recently, California suspended private student loan payments, and it’s possible other states may soon follow.
If you have outstanding private loans at high interest rates, then consolidating now or in the near future to take advantage of low rates might be an excellent idea. Be aware, however, that if you are lured by an extremely low variable interest rate, that those rates change with the market over the lifetime of your loan and can end up not being the best deal in the long run.
Why It’s a Good Idea to Pay Down Loans When Interest Is Low or 0%
If you have a private student loan with a variable rate, and the rate drops significantly, it is in your best interest to pay more on the loan during that time if you can. This is because, when the interest rate is lower, a larger portion of each payment goes toward paying down the principal loan balance, and you end up saving money in the long run.
If you are not significantly financially impacted by the current pandemic, it is also in your best interest to continue payments on your federal loans during the CARES Act suspension period. While it doesn’t hurt you in any way if you don’t make payments, you have the rare opportunity to target your principal balance while no interest is accruing. This means you may be able to pay your loan off sooner and at the less total cost.
As an illustration, suppose your initial loan balance was $30,000, and your interest rate was 5% for a 10-year period. This amounts to a monthly payment of $318.20 for 10 years. If you are halfway through the 10 years, and you suddenly have 0% interest for six months, but keep making the same payment, you will pay the loan off a month or two early at a savings of over $500. If your interest or loan balance is higher, or if you are earlier in the repayment process, the savings is greater.
However, if you are enrolled in a Public Service Loan Forgiveness (PSLF) program, each month of nonpayment counts as though it was a month of payment. If that is the case, you actually save money in the long run by not making payments during this period even if you can.
College Finance is here to guide you through the many changes that are occurring right now with federal and private student loans, as COVID-19 changes the global economic and educational landscape. College Finance’s experts offer resources for learning about borrowing, repaying, and understanding your student loans. Also, be sure to sign up for College Finance newsletters to receive the newest updates to your inbox automatically.