COVID-19, a highly contagious respiratory illness that was first identified in late 2019 and reached the United States by the end of January 2020, has taken the world by storm, resulting in a global pandemic. The U.S. government signed the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) into law on March 27, 2020, making it the largest emergency relief bill in U.S. history, as a way to ease the financial burdens associated with COVID-19.
The CARES Act provides many different types of financial relief, most notably through a $2 trillion package with six months of relief for most student loan borrowers. As a result, federal student loans have automatically been placed on interest-free administrative forbearance, which dropped interest rates down to 0% and put payments on hold until Sept. 30, 2020.
The first announcements of student loan relief were made on March 13. The U.S. Department of Education made the administrative forbearance of the CARES Act retroactive, allowing borrowers who made a payment on or after March 13 to contact their student loan servicer to request a refund for their payment.
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.
If your loan is currently in default, you will not be subject to collections activities through Sept. 30, 2020.
CARES Act Eligibility
Because of loan ownership, not all student loans are eligible for the CARES Act. Only federally-owned loans are eligible. If you are unsure of whether or not your loans are eligible, contact your loan servicer.
Federal student loans that are eligible for the benefits of the CARES Act include:
- 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.
Student loans, both federal and private, NOT eligible for the CARES Act relief include:
- Federal Family Education Loan Program loans not owned by the U.S. Department of Education are not eligible.
- Federal Perkins loans not owned by the U.S. Department of Education are not eligible.
- Private loans are not eligible.
What Is Forbearance?
Forbearance is a short-term option to temporarily suspend your student loan payments. Normally, borrowers have to apply for forbearance. If your loan is eligible for the CARES Act, it automatically goes into forbearance and will automatically exit forbearance on Sept. 30, 2020.
If you voluntarily suspend your payments temporarily, you’d typically need to consider the accruing interest on your loan, which would increase your balance and cause you to pay more over the life of your loan. Also, if you’re pursuing loan forgiveness, you’d have to consider that the time spent in forbearance would likely not count toward your forgiveness requirements.
However, for eligible federal student loans, interest is not accruing at this time, and the forbearance non-payments are counting toward forgiveness requirements through the CARES Act.
During the CARES Act forbearance, you are permitted to continue making payments if you’d like and only need to contact your loan servicer if you’d prefer to opt-out of the forbearance. Making payments during this time can help pay down your loan faster since payments will go toward the principal.
However, if you’re working toward student loan forgiveness, making payments may not be in your best interest. If you are eligible for Public Student Loan Forgiveness, making payments now would mean making unnecessary payments since the forbearance non-payments during this time count toward your 120 payments necessary for loan forgiveness. You can check with the Public Service Loan Forgiveness Help Tool to determine if your loans and employer qualify for Public Service Loan Forgiveness.
Federal Student Loans
With federal student loans, interest on loans during a forbearance is either paid as it accrues or it can be added to the principal balance of the loan (capitalized) once forbearance is over. Unpaid interest is not capitalized for Federal Perkins Loans; it is only capitalized on Direct Loans and Federal Family Education Loan Program loans.
Most forbearance types require a form request to your loan server that documents your eligibility. There is general forbearance and mandatory forbearance.
- General forbearance: Known as discretionary forbearance, this type of forbearance is often requested if the borrower is temporarily unable to make scheduled payments due to financial difficulties, medical expenses, employment changes, or other reasons approved by the loan servicer.
- Eligible loans include Direct Loans, Federal Family Education Loan Program loans, and Perkins loans.
- Forbearance cannot be granted for more than 12 months at a time, with a cumulative limit of three years
- Mandatory forbearance: Loan servicers are required to grant forbearance in specific circumstances.
- Eligible loans include Direct Loans and Federal Family Education Loan Program loans – unless another loan is specified for a specific instance.
- They can be granted for no more than 12 months at a time.
- Approved circumstances:
- You are serving in an AmeriCorps position that you have received a national service award for.
- You qualify for partial loan repayment under the U.S. Department of Defense’s Student Loan Repayment Program.
- You are serving in a medical internship or residency program, or a dental internship or residency program, and meet certain requirements.
- You are not eligible for a military deferment but are a member of the National Guard and have been activated by a governor.
- The total amount you owe on federal student loans each month is 20% or more of your total monthly gross income (this is only good for up to three years and applies to Direct Loans, FFEL Program Loans, and Perkins Loans).
- You are performing a teaching service that qualifies you for teacher loan forgiveness.
If you defer your federal loans, interest is not accrued.
Normally, forbearance is suggested after exploring different student loan repayment plans, including income-driven repayment plans, however, with the CARES Act, forbearance is a unique situation, and is being provided to borrowers regardless of need.
Private Student Loans
Most private student loan lenders allow forbearance, though not all do. Examples of private lender forbearance periods include while you’re still a student, immediately after graduation, and for short periods of time if you’re out of work. Lenders have the option of charging a fee for putting private student loans into forbearance, in addition to the accrual of interest.
Compared to federal student loan forbearance terms, private lenders offer shorter forbearance terms – requiring you to apply more often – and have flexibility regarding whether or not they approve or deny a forbearance request.
Private lenders do not offer deferment, leaving forbearance as the only option to pause student loan payments.
To request forbearance from a private loan servicer, you should:
- Explain your financial situation
- Seek options for flexible payments (i.e., temporarily lowered interest rates, switching to an interest-only plan, pausing payments)
- Clearly understand your options before enrolling in a new repayment plan
While private student loans are not eligible for the CARES Act, you can refinance your private student loans. Student loan refinancing rates are at a near-term low, which helps those who refinance save money through a lower interest rate and pay off their debt faster.
Consolidating Ineligible Loans
Federal student and parent loans are eligible for consolidation. Consolidating your student loans allows you to combine multiple student loans into one, reducing the number of monthly payments you make.
If your federal loans are not eligible for the CARES Act – for example, if they are older federal or parent loans originated under the former FFEL program and NOT currently held by the Department of Education – you do have the option to consolidate your student loans. The Direct Consolidation Loan allows you to combine multiple federal student loans that are ineligible for the CARES Act into one that is then eligible for relief under act.
Federal Direct Consolidation Loans have advantages and disadvantages, depending on your circumstances. They can simplify your loan payments, and if not already eligible for income-driven repayment options, can make your loan eligible for them, as well as change variable interest rates into a fixed interest rate. They can also increase the life of your loan. Any outstanding interest prior to consolidation becomes part of the principal of the consolidated loan, meaning that you’re paying interest on previous interest. And, if you have certain borrower benefits like interest rate discounts, loan cancelation benefits, or principal rebates, those may be lost. If you’re making payments that count toward Public Student Loan Forgiveness, and you consolidate your loans, you will lose credit for any previously made payments.
If your student loans are not eligible for the CARES Act relief package, you still have options. At College Finance, we strive to provide you with the most up-to-date and relevant information regarding your college finances, with an emphasis on borrowing to pay for school and paying back your student loans. Be sure to sign up for our emails to get the latest news straight to your inbox.