There are a few noteworthy changes to your student loans that arose from the government’s response to the coronavirus pandemic. What does Trump’s Student Loan Relief mean for you?
In President Trump’s press conference on Friday, March 13, among declaring a national emergency he briefly announced that student loan interest would be waived during the novel coronavirus pandemic effective immediately. On March 22 we learned that payments could be paused by requesting a waiver and would be paused automatically if a borrower becomes or is more than 31 days late on their payment. As of March 27, with the signing of the CARES Act, federally owned student loans will have an automatic payment waiver, but borrowers will still earn credit towards Public Service Loan Forgiveness. As new policies are introduced, we will continue to update this article.
March 13 Update: Federal Student Loan Interest Paused
This new policy on student loans will essentially freeze all new interest charges on federal student loans, in hopes of offering relief to borrowers.
This comes with some backlash, as many lawmakers argue this is not doing enough to help borrowers as much as some might hope. Other proposals suggest pausing student loan payments altogether, a measure that would help with the cash flow needs of millions of Americans whose income was affected by the coronavirus.
Senators Patty Murray, Kirsten Gillibrand, and Chuck Schumer introduced a bill, ‘Supporting Students in Response to Coronavirus Act’’. Senate Democrats listed federal student loan payment relief at the top of their list in their COVID- 19 Economic and Community Services Proposal, requesting student loan payment forbearance for six months for all Americans whose income was affected by a coronavirus.
The problem with offering a suspension on interest charges is that it does not help borrowers right now. The benefits of this policy will not be realized for years to come, as the only true benefit to borrowers is a shortened time frame to pay off their loans. Borrowers pursuing Public Service Loan Forgiveness will not benefit at all from this policy.
Because payments are not affected by this policy, borrowers are not seeing immediate relief during a time when many need help now – not years from now. Many borrowers are facing a sharp decline in their income, especially those in retail, food service, or entertainment industries. Without relief on their student loan payment, many may choose to pay their electric bill or put food on their table overpaying their student loans causing more loans to become past due or go into default.
March 22 Update: Option to Pause Payments Introduced
A week after announcing their policy to pause student loan interest, the administration added a new policy to pause student loan payments for at least 60 days if requested through a process called administrative forbearance. Borrowers who are 31 days or more delinquent will automatically have their payments suspended.
According to the Department of Education’s press release on March 20, 2020, borrowers will need to request for payments to be suspended unless they are already delinquent, or become 31 days delinquent.
There are differing opinions on whether or not this policy should be an “opt-in” or an “opt-out” suspension of payments. The National Association of Student Financial Aid Administrators, NASFAA, argues that this should be an opt-out policy. This would effectively pause student loan payments for all federal student loan borrowers, and allow borrowers to opt-out if they want to continue payments. They are also requesting that payment counts towards Public Service Loan Forgiveness and Time-Based Forgiveness for borrowers on an income-driven repayment plan continue even as borrowers are in this automatic forbearance.
There are administrative benefits to changing this policy to an opt-out policy as it could help relieve the burden on loan servicers as they manage the ongoing changes to student loan policies due to the coronavirus pandemic.
March 27 Update: Payments Automatically Paused Until September 30, 2020
On March 27, President Trump signed the CARES Act which added additional changes to your student loans due to the coronavirus response.
The main addition to the existing policies is an automatic waiver of payments for federal student loan borrowers. Incredibly, borrowers who were working towards loan forgiveness programs will still earn credit as if they were still making payments. If you are working towards Public Service Loan Forgiveness, you just received six months of free qualifying payments.
Which student loans qualify?
Only federally owned student loans qualify for these policies. This includes all Federal Direct Student Loans and Stafford Loans but excludes all private student loans, FFEL loans, and Perkins loans as these are not owned by the government. FFEL loans are held by commercial lenders and Perkins loans are held by schools, the federal government backs these loans but it does not have the same level of control over them as they do with Federal Direct or Stafford student loans.
You can consolidate non-qualifying federal student loans into a Direct Consolidation loan to qualify for the interest waiver. However, the consolidation process, if not done correctly, can derail your path to loan forgiveness and cause your interest to capitalize.
If you are not sure what types of loans you have, log into the Federal Student Aid website and review your National Student Loan Data File.
If your loans are in deferment or forbearance, this policy will apply to you as well. Loans that qualify can be on any repayment plan. If you are on an income-driven, standard, or another repayment plan and your loan type qualifies, your interest charges will be waived.
This does not automatically mean you will pay more towards your principal balance.
Just because you are not being charged interest on your federal student loan does not mean that your payment will go towards paying down your principal balance.
You might not be paying towards your principal balance if you have an accrued interest balance, because payments are applied to accrued interest first. So far, there has not been a proposal to waive accrued interest. If you have an outstanding interest balance, your payments will help pay down that portion of your loan first, then go to the principal balance.
However, during this time your payment will go further than they did before because new interest charges are not being added to your interest balance.
|Principal Balance||$50,000||Payment is only applied here once the interest balance is paid|
|Interest Balance||$2,000||Payment goes here first|
How will this affect your payment?
Payments will be automatically paused until September 30, 2020. If you would like to make a payment, you will need to call your loan servicer.
Loan servicers will continue to count these paused payments towards forgiveness programs, such as Public Service Loan Forgiveness as if you were paying as normal.
If you are seeking a lower payment past the September 30th expiration, you will still need to apply for an income-driven repayment plan or recertify your income if you are already on one. If you have lost your income, applying for an income-driven repayment plan could lower your payment to $0. With the pause in interest charges, your loan balance basically stays as is while this policy is in place. By applying for an income-driven repayment plan or recertifying your loan you lock in a lower payment for 12 months, offering relief long after the September 30, 2020 release of the payment waiver.
What about student loans in deferment or forbearance?
If your federal student loans are in deferment or forbearance, as the policy stands now, interest will be waived for you as well if you have the right types of loans. If you are in deferment or forbearance and your income has dropped significantly because of coronavirus, now might be a good time to apply for an income-driven repayment plan to lock in a low monthly payment.
For those still in school or have loans that are in a grace period, you will not be charged interest while this policy is in place. There are no known changes to the rules around in school statuses and grace periods for after graduation.
How much will this save you?
Depending on your loan balance and average interest rate, this policy could save you thousands, or as little as a few hundred dollars.
This calculator can help you estimate how much this policy will save you in interest charges.
If you owe $200,000 in federal student loans at 5%, you could save roughly $5,000 over 6 months in interest charges. For someone owing much less, say $25,000, this policy of pausing interest charges only saves roughly $625 over a 6 month period.
For the government, this policy is costing them roughly $37.8 billion dollars over 6 months, assuming an average rate of 5%. If we consider there are 42.8 million borrowers, this policy might only be saving each borrower roughly $885 over 6 months.
However, many argue that this money could be put to better use. With the same $37.8 billion dollars, the government could pay off all student loan balances of less than $5,000, completely paying off the student loan balances of 24% of all borrowers and still have $16 billion left.
What if you are pursuing Public Service Loan Forgiveness?
If you are pursuing Public Service Loan Forgiveness, you will essentially gain six free months towards your qualifying payment count.
Over the next few weeks or months, your loan balance will not grow, possibly slightly reducing the balance of your loans when they are forgiven. However, your timeline for forgiveness will not change because the payment count is based on how many payments you make, not how that payment is applied.
Unfortunately, if you are not employed, any payments made towards your loans may not go towards the 120 payments required to get Public Service Loan Forgiveness. The policy states that borrowers will receive payment counts towards Public Service Loan Forgiveness if they would have under normal circumstances. Remember, payment counts towards Public Service Loan Forgiveness do not have to be consecutive.
What if you are pursuing Time- Based Forgiveness on an Income-Driven Repayment Plan?
If you are pursuing Time- Based Forgiveness on an income-driven repayment plan, you will continue earning payment counts towards the 20 or 25-year requirement for forgiveness, even if you are not making payments due to the automatic payment waiver. This new policy could help reduce your tax burden when your loans are forgiven because interest is also paused. The time it takes to reach the 20 or 25-year requirement for Time- Based Forgiveness will not be sped up by this policy.
Are they any negative outcomes because of this policy?
There is a negative side effect to this policy, it could cause your tax bill to go up due to a reduction of your tax deduction for student loan interest. Come tax time in 2021, you may be unable to write off your “normal” amount of student loan interest paid because you were not charged as much interest in 2020 as expected.
If you are used to writing off a large chunk of your student loan interest, it might be time to evaluate your estimated taxes for 2020.
It is unlikely this policy will continue into 2021, so this increase in taxes should only affect your 2020 taxes.
Why would Trump enact a policy to pause student loan interest charges?
Due to a low-interest-rate environment, the Department of Education may have been concerned that they will lose borrowers to attractive private student loan offers. However, private loan lenders have started raising rates because of an increase of borrower’s default risk.
We could see far fewer borrowers refinancing their federal student loans into private student loans during this time. As rates began to fall many borrowers quickly refinanced or seriously considered refinancing their student loans, but now that their federal loans are not being charged interest many will probably wait.
What could go wrong?
It is unlikely student loan servicers will be able to actually implement this new policy without a few hiccups. It is likely that student loan servicers first heard of this policy during President Trump’s press release, and that they are awaiting guidance from the Education Department.
I would not expect to see your interest waived in your account in real-time, instead expect an adjustment much later.
Another problem, student loan servicer representatives and administrators may be sent home due to coronavirus, causing a massive backlog. A backlog that will be much worse than we experienced during the government shutdown last year.
How do you get this interest waiver?
This student loan interest waiver is automatic, so you will not need to call your loan servicer or fill out another form to be eligible.
I would suggest monitoring your student loan balance and preparing for adjustments in the future. When you log in to your loan servicer to view your account, you may see that you owe more than you actually do in the coming months.
How do you get the payment waiver?
The payment waiver is now automatic as well. Payments on federally owned student loans will be waived until September 30, 2020. You can call your loan servicer to voluntarily opt-out of the payment waiver if you would like to make a payment.
Will this policy help you?
There’s still a lot we do not know about this policy.
If you are pursuing Public Service Loan Forgiveness the policy to pause student loan interest will not help you financially per se, but it could help ease your anxiety as you will not be watching your loan balance grow as much it has in the past for the next few months. However, because the automatic payment waiver allows you to earn six free credits towards your 120 qualifying payment count – this policy saves you six months of payments.
For those pursuing Time- Based Forgiveness, the policy to pause interest charges will help when your loans are forgiven by reducing your tax burden slightly. You will also receive six free months of credits towards your 20 or 25-year requirement for forgiveness.
For everyone else, do not expect immediate benefits from the policy to pause interest charges. The benefits of being charged interest on your student loans will not be realized until many years to come for most. In general, this will reduce the timeline of repayment for many borrowers and reduce their total out of pocket costs over the life of their loan.
This policy essentially freezes your federally owned student loans in place for six months but also allows you to continue earning credit towards forgiveness programs.
Wonder what else you can do now to help your financial situation? Our book is coming out and it’s full of impactful tips! Just visit www.financialresidency.com/book to get notified for when it releases!