It’s not hyperbole to say that we’re living in unprecedented times. Beyond the uncertainty of how long the coronavirus pandemic will remain a serious health threat is a fear of what it will do to the global economy. For the United States and nations around the world, economic gains achieved in the last decade have been gutted in a matter of weeks. And as the number of Americans filing for unemployment benefits continues to grow, many people are wondering how they’re going to survive until life goes back to “normal,” whatever that will look like.
But it’s not just about affording essentials like food, housing, and utilities. While measures for mortgages and rental assistance have been broadly advertised by federal and local governments, as well as major financial institutions and utilities, to support Americans in need, the path forward hasn’t been so clear cut for student loan repayments.
Many people are now faced with the question of how to manage their student loans. Even if you were on a payment plan, an unexpected layoff and delayed unemployment benefits could mean you’ll fall behind on regular payments. So, what should you do if you can’t pay your student loans because you lost your job due to the coronavirus?
Private vs. Federal Student Loans
One of the first things you’ll need to consider is whether your student loans are backed by the federal government versus a private lender. Depending on which category you fall under, the opportunities or preventative measures available to you may vary dramatically.
So, if you’re not sure, check your loan details on StudentAid.gov, or contact your lender to confirm which category applies to you.
Coronavirus and Federal Student Loans
If your student loans are backed by the federal government, there were measures put in place through the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, 2020, that are designed to protect you while the nation navigates our new normal under the coronavirus.
First, all federal student loan payments have been automatically put on hold for the period between March 13 and Sept. 30, 2020. The official term is that your current outstanding loans have been placed into an administrative forbearance during this time. While you can make payments during this forbearance period, you’re under no obligation to do so, and you won’t be penalized for nonpayment. As for now, when Sept. 30, 2020, passes, payments will resume.
0% Interest Period
Additionally, the following loans owned by the Department of Education will not accrue interest during this forbearance period: defaulted and nondefaulted Direct Loans and FFEL Program Loans, as well as Federal Perkins Loans. If your FFEL or Perkins Loans are owned by your college institution or a commercial lender, then you are not eligible for the 0% interest period. If your loans are federally owned, you don’t need to do anything to activate the 0% interest period.
If you had an automatic payment plan where your bank account was automatically debited, that has also been suspended until Sept. 30, 2020. But if you see charges on your account, contact your loan provider to have the money refunded if you prefer.
Roughly a month before the forbearance is set to suspend, your lender will contact you to remind you that payments will resume after Sept. 30, 2020.
If You Can Make Payments, You Should
Obviously, if you can’t make payments, having a six-month grace period is great because you can rebuild your finances and survive until the economy reopens. But if you haven’t been laid off or aren’t reliant on unemployment, making payments during this forbearance period is a great way to lower the principal if you can. Specifically, any payments made during the forbearance will be applied to the principal of your loan once any interest accrued up to March 13, 2020, has been paid.
Student Loan Repayment Plans and Coronavirus Forbearance
If you were actively participating in an Income-Driven Repayment (IDR) plan or the Public Service Loan Forgiveness (PSLF) program, the suspended payment under the coronavirus forbearance through the CARES Act would count positively toward the terms of your plan.
Specifically, for PSLF participants, as long as you had a qualifying plan before the forbearance period and are working full-time for a qualifying employer during the suspension, you’ll also receive credit as if you made timely payments during the coronavirus forbearance.
Likewise, if you’re in the process of rehabilitating a defaulted student loan, those suspended payments during the coronavirus forbearance period will count toward rehabilitation.
What If I Made Payments Before the CARES Act Was Passed?
If you made a payment between March 13 and March 27, 2020, you can request a refund by contacting your lender.
Coronavirus and Private Student Loans
Privately held loans are not protected under any of the provisions created by the CARES Act. That means roughly 6 million borrowers in the U.S. won’t be able to access those same benefits that borrowers with federally held student loans can utilize. However, depending on your place of residence, individual state legislations have enacted protections for student loan repayments that could give you relief if you’re repaying a privately held loan. So it’s a good idea to check with your state government to confirm what options or relief is available to you.
For people with student loans held by a commercial bank or their educational institution, the best thing you can do is contact your lender. Considering how widespread the economic fallout has been from the coronavirus, many lenders are offering a form of forbearance, as well as allowing borrowers to establish an income-driven repayment plan, unemployment deferment, or economic hardship deferment to ease the financial burden without hurting their credit.
What If I Can’t Afford My Payments?
Regardless of whether you already had an income-driven repayment plan before the coronavirus pandemic or are just now facing economic hardship, you should contact your lender to have your payments recalculated.
If you can’t make any payments right now, request a forbearance or deferment period, but be aware that private lenders may continue to charge interest during your forbearance period. Specifically, for Perkins Loans borrowers, the maximum forbearance period you can receive is three months. For those already under an IDR plan, you may be able to get your payments further reduced by having your current income recalculated. But you also might want to consider a Direct Consolidation Loan.
What’s a Direct Consolidation Loan?
A Direct Consolidation Loan is managed by the federal government but can be facilitated by your lender. This is an option that is available to borrowers with Perkins and FFELP loans that are privately held.This is one of the ways that borrowers with privately held loans can access the benefits of the CARES Act. Specifically, you can take advantage of the 0% interest during the CARES forbearance period. Plus, it qualifies you for an IDR plan or the PSLF program.
But if you opt for this method, be aware that this is not student loan refinancing. In fact, it’s not uncommon that your interest rate may rise slightly since your new interest rate is compiled by averaging your current rates and rounding up to the nearest eighth of a percentage. Plus, Direct Consolidation Loans aren’t usually processed quickly. Usually, it takes 30 days. So, depending on when you submit your application, you might not get the full six months of CARES Act benefits.
Putting It All Together
The coronavirus has thrown the entire world for a loop, both in terms of the immediate public health crisis it has created and the ripple effect of financial uncertainty that will be with us for many months to come. While no one knows what the new normal will look like as the economy reopens, it doesn’t have to mean falling behind on your student loan payments.
While borrowers with federally held student loans can automatically access coronavirus relief with little effort, that doesn’t mean borrowers with privately held student loans are left out in the cold. When in doubt, contact your lender and talk with them to determine your available short-term options. Or you can apply for a Direct Consolidation Loan and turn your existing private loan into a federally owned one with access to all of the CARES Act benefits.
If you still have questions about student loans during these uncertain times, College Finance can help. We provide up-to-date resources so you can make an informed decision no matter what stage of the college process you’re in, whether that’s planning, borrowing, or repayment.