On March 20th the Department of Education announced that all borrowers with federally-held student loans would get some relief during the COVID-19 national emergency.(1) When the CARES Act was signed into law on March 27th, concessions for student loan borrowers were extended even further.(2) Federal student loan borrowers were automatically placed in an administrative forbearance through September 30th, which means payments are not required during this time. In addition, interest rates on federal student loans are temporarily set at 0%. Both the administrative forbearance and 0% interest rate are effective beginning March 13th. This applies to Direct Loans, some FFEL Program loans, and some Perkins Loans. Exceptions to this 0% interest rate concession include: FFEL loans owned by commercial lenders, Perkins loans owned by the school attended, and private student loans. This article serves to summarize the benefits available to student loan borrowers as a result of recent legislation, as well as talk through recommendations on how to handle your individual student loan situation given these short-term changes.
If you own one of the FFEL or Perkins loans mentioned above which are not currently eligible for the 0% interest rate, you could become eligible by applying for a federal Direct Consolidation Loan. However, you would want to consider the long-term implications of this change such as new interest rate once the 0% interest rate period ends, whether you have unpaid interest that would capitalize (more on how interest capitalization works below), and how this change would affect eligibility for forgiveness programs before making a change for this short-term relief.
The Department of Education suspended wage or Social Security garnishment and federal tax refund offset for borrowers who had defaulted on their federal student loans on March 13th(1). The CARES Act extended this suspension through September 30th. If you were experiencing garnishment or offset previously, this would be a great opportunity to contact your student loan collection agency about getting back in good standing. Usually, the most accessible option is called a “rehabilitation plan,” which involves nine months of income-based payments to bring your loan out of default. These payments can be as low as five dollars per month. Even if you have experienced reduced pay or hours, consider if you could make these payments for the benefits of removing the garnishment moving forward and improving future credit reporting. If you start the rehabilitation plan now, you will only need to make one payment each month instead of paying these new payments in addition to your garnishment. To find your student loan collection agency and start the process, call the Department of Education’s automated Default Resolution line at 1-800-621-3115.
Payments that were set up to be automatically drafted will be suspended during the administrative forbearance period. If any payments are processed during this period (March 13, 2020 – September 30, 2020), then they can be refunded to you. To receive a refund, contact your student loan servicer.
Even with the zero percent interest rate and suspension of payments, there could still be reasons to continue paying down student loan debt. Once other financial needs and priorities are met, if you have a monthly budget surplus or receive additional income (such as a $1,200 stimulus check) continuing to make payments could be a savvy move. In almost all cases, this is an opportunity for your payments to make more impact on reducing your loan balance since additional interest is not accruing. If you have accrued interest, all of the payments you make will go towards paying this down, getting you one step closer to paying down principal. If you don’t have accrued interest, then 100% of the payments you make will go towards principal, a rare opportunity! In order to continue making payments by automatic draft, you should contact your student loan servicer to opt-out of the administrative forbearance. Another option is to stay in the forbearance but make manual, voluntary payments when you are able. This second option allows flexibility for making payments at varying times and amounts without risking negative consequences like late fees or negative credit reporting.
From my perspective, there is one, big looming question that has not yet been clarified by the Department of Education. In typical circumstances, when a borrower requests a forbearance, at the end of the forbearance period all unpaid interest becomes capitalized. This means the interest gets added into the loan’s principal balance and the borrower then starts paying interest on interest. This may not be a big deal when there is a small amount of accrued or unpaid interest, but for recent graduates or borrowers in income-driven plans, this amount can be large and when capitalized will greatly impact the long-term loan payoff. The Department of Education has not yet stated whether borrowers’ unpaid interest will capitalize when this special administrative forbearance ends like it would with other forbearance periods.
If you’re pursuing Public Service Loan Forgiveness and you were on a qualifying repayment plan prior to the suspension in addition to continuing to work full-time for a qualifying employer, then you will receive credit for each month during this period as if you had made on-time monthly payments. In different words: there is no advantage to making payments during this forbearance since you are anticipating forgiveness and these months where you aren’t required to pay still count towards your 120-month goal.
Any opinions are those of Kathryn Beach and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice.