Right now, you might find yourself asking if you should make payments on your student loan if it is deferred because of coronavirus. COVID-19, a type of coronavirus that is incredibly contagious, was first identified in late 2019 and reached the United States by the end of January 2020.
It has fundamentally changed the U.S. education system and economy, and as a result, on March 27, 2020, the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) was signed into law. So far, it is the largest emergency relief bill in U.S. history.
Among other forms of relief, the CARES Act includes a $2 trillion package with six months of student loan relief for most student loan borrowers. If you have an eligible federal student loan, your loan has automatically been placed on interest-free administrative forbearance (your interest rates are 0% right now, and you can temporarily stop paying your student loan payments) until Sept. 30, 2020.
If you want to continue making payments, you are eligible to do so; however, it may not be in your best interest. For borrowers seeking loan forgiveness either under income-driven repayment or the Public Service Loan Forgiveness Program, non-payments count as though they had been made before the pandemic.
Student loan relief was originally announced on March 13, 2020, and as a result, the Department of Education has made the administrative forbearance retroactive to the earlier March date. Additionally, borrowers who made a payment on or after March 13 are permitted to contact their student loan servicer to request a refund for their student loan payment.
If your loan is currently in default, you will not be subject to collections activities through Sept. 30, 2020.
Your loan servicer is your best resource for determining if your federal student loan is eligible for forbearance.
Forms of Temporary Relief
Deferment and forbearance are two forms of temporary relief for payments of student loans, as well as changing to an income-driven repayment plan. Though deferment and forbearance are similar – both allow you to postpone payments, interest typically accrues, and the time period is not likely to count toward forgiveness requirements – there are differences between the two programs.
With deferment, interest typically does not accrue on Direct Subsidized Loans, the subsidized portion of Direct Consolidation Loans, the subsidized portion of Federal Family Education Loan Program Consolidation Loans, and Federal Perkins Loans. Any unpaid interest accrued during deferment may be added to the principal balance (capitalized) of all other types of loans.
Forbearance is when your monthly payments are temporarily suspended or reduced, and principal payments are postponed but interest continues to accrue. Unpaid accrued interest is capitalized, which increases the total amount you owe. Forbearance is typically granted by lenders if you are unable to make your payments because of a financial hardship.
Though the differences seem relatively minor, they are important in terms of COVID-19 aid through the CARES Act.The third form of temporary relief is to switch to an income-driven repayment plan. Income-driven repayment plans calculate your monthly payment based on your annual income and the size of your family, ranging from $0 to 20% of your discretionary income. For some plans, if your balance is not paid in full after 20 to 25 years, it can be forgiven; however, you may have to pay taxes on the forgiven amount, which can be significant.
CARES Act Eligibility
Certain types of federal student loans are eligible for the CARES Act, including:
- Direct Loans
- Federal Family Education Loan Program loans owned by the U.S. Department of Education
- Perkins Loans owned by the U.S. Department of Education.
Those with any other type of loan are not eligible for the CARES Act; however, private lenders are offering assistance to borrowers in need.
- Federal Family Education Loan Program loans not owned by the U.S. Department of Education.
- Federal Perkins loans not owned by the U.S. Department of Education.
- Private loans.
Making Payments During Deferment or Forbearance
If your student loan is eligible for the CARES Act, and you want to continue making payments, you can contact your loan servicer and ask to opt-out of the automatic administrative forbearance. Because interest will not be accruing on your federal student loan at this time, your payment, after covering any outstanding interest, will go toward the principal, helping you to pay down your loan faster.
If your student loan is not eligible for the CARES Act, and your private or commercial lender – be it a private company, your school, or another entity -– offers you deferment, you have the option to pause your payments. Depending on the limitations the lender places on you during this term, making payments may be to your advantage.
However, there are times when making student loan payments when you don’t have to is disadvantageous.
Saving for Other Purposes
If you have loans that are eligible for the CARES Act, you do not have to make payments at this time. If you are in a position where you are able to make payments, there may be reasons not to make extra payments on your student loans at this time. Although any payments made now will chip away at the principal balance, lowering the interest you will pay over the course of the loan, there may be better, short-term ways for you to spend the money that would otherwise be going to your student loan payments.
For example, if your loan payment is typically $400 a month, you’d be paying $2,400 over the next six months. While you could use that $2,400 to pay down the principal of your student loan, there may be other things you can do with that money that are more pressing.
- If you have lost your source of income and need money for rent and groceries, that $400 a month can make a big difference.
- If you have student loans from several lenders, all with different interest rates, you should redirect any funds you’d have spent on your now-deferred loan to the loan with the highest interest. There are conflicting theories as to which debt you should pay off first – the loan with the highest balance or the loan with the highest interest. However, paying off the loan with the highest interest first results in you paying less in the long term.
- Consider whether investing the money would provide a better return than paying off your loan. If your student loan rate is 6%, and your return on investment is 7%, you might be better off investing the money at this time.
- If you do not have an emergency fund set up, it might be better to save the money for now so that you have it when you really need it. For instance, if your car breaks down, your roof has a leak, or you need to repair a large appliance.
- If you are on an income-driven repayment plan or eligible Public Service Loan Forgiveness plan, non-payments during this time may count toward the necessary payments needed for loan forgiveness. For CARES Act eligible federal student loans, non-payments during this time count as though you were still making on-time monthly payments. To determine if your loan is eligible for forgiveness during the COVID-19 pandemic, confirm with your loan servicer and the federal guidelines.
Contact Your Private Lender for Direction
Though private student loans are not eligible for the CARES Act, Direct Consolidation, or federal forbearance programs, some lenders are offering case-by-case assistance through alternative payment plans, or deferments as a result of the COVID-19 pandemic.
Just some of the many lenders that have announced new policies include Discover, SoFi, CommonBond, Citizens Bank, and the Rhode Island Student Loan Authority.
As new information continues to emerge regarding COVID-19 and lenders, the best way to learn about your options for a private loan is to contact your lender. Since your loan is deferred, they will be able to go over all of the pros and cons of payments – including whether or not there are fees associated with making payments at this time – to decide the best course of action for you.
Deciding whether or not to make payments on a student loan during deferment is a personal decision that only you can make. Consider your options to determine if that money would be better invested elsewhere and what sort of fees might be involved with making payments during this time.
We encourage you to contact your loan servicer, crunch your numbers, evaluate your current financial situation, and then make the decision of whether or not to make payments on your student loan during this difficult time.
Student loans are complicated enough as-is. At College Finance, we offer tools and expert assistance to help you determine what’s right for you. We are exploring the best options available in light of COVID-19 and are constantly updating our website. To be in-the-know and have the newest information available at all times, sign up to receive College Finance emails delivered directly to your inbox.
