The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020, in response to COVID-19. The CARES Act is the “largest emergency relief bill in U.S. history,” providing federal student loan relief, among other types of financial relief. The Act includes a $2 trillion package with “six months of relief for most student borrowers.”
In fact, eligible federal student loan borrowers have been placed on administrative forbearance (meaning that borrowers can temporarily stop making their monthly loan payment, and interest has been brought down to 0%) until Sept. 30, 2020.
The administrative forbearance isn’t mandatory, however, and those who want to continue making payments can do so by contacting their loan servicer and asking to opt out.
For borrowers seeking loan forgiveness either under income-driven repayment or the Public Service Loan Forgiveness (PSLF) program, suspended payments will still count toward these programs.
The Department of Education has made the administrative forbearance retroactive to March 13, 2020. Borrowers who made a payment on or after March 13 are allowed to contact their student loan servicer to request a refund.
As well, if your loan is currently in default, you will not be subject to collections activities through Sept. 30, 2020.
CARES Act Eligibility
Student loans that are eligible for the CARES Act include:
- Direct Loans
- Federal Family Education Loan (FFEL) Program loans owned by the Department of Education
- Perkins Loans owned by the Department of Education
Student loans not eligible for the CARES Act include:
- Federal Family Education Loan (FFEL) Program loans not owned by the Department of Education
- Perkins Loans not owned by the Department of Education
- Private loans
If you have a combination of loans or are not sure if your loans are eligible for the CARES Act, contact your loan servicer.
Student Loans Eligible for the CARES Act
While payments are automatically suspended through Sept. 30, 2020, borrowers may want to consider the following:
- Are there benefits to continuing to make student loan payments?
- Are there drawbacks to continuing to make student loan payments? (Can the money I’m saving by not making payments be put to better use at this time?)
- Will payments impact my student loan forgiveness, whether through income-based repayment plans or the Public Student Loan Forgiveness (PSLF) program?
Benefits of Making Student Loan Payments
If you are in good financial standing, you may choose to continue making federal student loan payments.
With 0% interest, you can pay down your loan faster, as all payments will go toward the principal balance after any outstanding interest is paid. Because of this, those payments will have a bigger impact on the total cost of your loan. By reducing your loan by six months’ worth of principal, it could, over the life of your loan, drastically reduce the interest.
If you are not experiencing any financial hardship, it could be beneficial to continue making your student loan payments; after all, once the forbearance is over, your balance will remain the same as it was before.
Drawbacks to Making Student Loan Payments
There are a few drawbacks to continuing to make federal student loan payments during this period of administrative forbearance.
- If you have higher-interest debts, you can direct your suspended payments toward paying them off first. While it is important to pay off any and all of your loans, to the extent that you are required, tacking those with higher interest can help you save money in the long term.
- Investing the available funds might be a better long-term strategy if your projected returns (such as through a high-interest savings account or CD) are more than the interest of your loan over time.
- If you don’t have much of a nest egg, now is the time to create an emergency savings fund.
- You might need the money for groceries and other necessary purchases.
Impacts on Student Loan Forgiveness
If you are working toward Public Student Loan Forgiveness (PSLF), as long as you’re still working full time for a qualifying employer and meet the program’s other requirements, suspended payments will still count toward PSLF under the CARES Act. However, if you have been laid off, furloughed, or your hours have been reduced to less than 30 hours a week, payments made during this time (including suspended payments) will not count toward PSLF.
Because nonpayments still count toward the program if you meet the requirements, if you continue to make regular payments, you’re going to be paying more than you need to. And if you no longer qualify, payments made don’t count toward forgiveness. Once you are eligible again, however, you can return to making payments that will count toward PSLF.
You can utilize the Public Service Loan Forgiveness (PSLF) Help Tool to determine if your loans and employer qualify.
Ineligible Federal Student Loan Options
If your federal student loans are ineligible for the CARES Act, you still have options. You can consolidate your ineligible federal student loans, contact your loan servicer to determine if you are qualified for forbearance or deferment, and see if you can change your payment plan to one that is more affordable at this time.
The Direct Consolidation Loan allows you to combine multiple federal student loans into one loan, consolidating multiple monthly payments into one monthly payment. This can change variable interest rates into fixed interest rates and possibly make your Direct Consolidation Loan eligible for the CARES Act. However, keep in mind that if you are making payments toward any type of loan forgiveness and consolidate your loans, your payment count will be reset.
Federal student loans that are eligible for consolidation:
- Auxiliary Loans to Assist Students
- Direct PLUS Loans
- Direct Subsidized and Direct Unsubsidized Loans
- Federal Perkins Loans
- FFEL Consolidation Loans and Direct Consolidation Loans (only under certain conditions)
- Guaranteed Student Loans
- Health Education Assistance Loans
- Health Professions Student Loans
- Loans for Disadvantaged Students
- National Defense Student Loans
- National Direct Student Loans
- Nurse Faculty Loans
- Nursing Student Loans
- Parent Loans for Undergraduate Students
- PLUS Loans from the Federal Family Education Loan (FFEL) Program
- Subsidized Federal Stafford Loans
- Supplemental Loans for Students
Unsubsidized and Nonsubsidized Federal Stafford Loans
There are many repayment plans available for federal student loans, which can be changed at any time without any fees, including plans that are income-based. This comes in especially handy when your income changes, as the monthly payments for these plans can be as low as $0.
- Standard Repayment Plan: Monthly payments are fixed, all borrowers are eligible, and loans are paid off within 10 years (or 10 to 30 years with Consolidation Loans).
- Graduated Repayment Plan: Payments start lower and gradually increase, all borrowers are eligible, and loans are paid off within 10 years (or 10-30 years for Consolidation Loans).
- Extended Repayment Plan: Loans are paid off within 25 years.
- Revised Pay As You Earn Repayment Plan (REPAYE): Monthly payments are 10% of your discretionary income, with eligible plans.
- Pay As You Earn Repayment Plan (PAYE): Monthly payments are 10% of your discretionary income, but not more than what you would pay under the 10-year standard repayment plan, with eligible plans.
- Income-Based Repayment Plan (IBR): Monthly payments are either 10% or 15% of your discretionary income, but no more than what you would pay under the 10-year standard repayment plan.
- Income-Contingent Repayment Plan (ICR): Monthly payments are either 20% of your discretionary income or the amount you would pay on a fixed payment plan for 12 years for eligible plans.
- Income-Sensitive Repayment Plan: Your monthly payment is based on your annual income.
To learn more about your options for federal student loans not eligible under the CARES Act, contact your loan servicer.
Here for You Every Step of the Way
The experts at College Finance are here to guide you through the ins and outs of how the CARES Act may impact your federal student loans. Whether you continue to make student loan payments during this time of forbearance, you need to make the most informed decisions possible, based on what is right for you. College Finance is here to provide updated, relevant, and easily understood information to help you with loan planning, borrowing, repayment, and more.