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Updated: May 13, 2020
The Coronavirus Aid, Relief, and Economic Security (CARES) Act made important changes to federally held student loans, including automatic payment deferrals and a pause on interest. However, the law also brings up questions about student loan relief, implications if you’re working toward loan forgiveness, and options for student loans that aren’t impacted.
The CARES Act automatically provides several benefits on eligible, federally held loans:
You don’t need to do anything to receive either benefit, and your loan servicer should have made these changes for you already. However, the benefits in regards to student loan relief during COVID pandemic only apply to federally held student loans (a distinction from private loans and federally guaranteed loans). Eligible loans could include the following types of student loans, whether they’re current or in default:
Other student loans aren’t eligible for these relief benefits. These include all private student loans and some FFEL and Perkins loans. That’s because private lenders may hold FFEL loans, and schools may hold the Perkins loans.
If you’re working toward having your student loans forgiven, you may worry that having your payments paused by the CARES Act will set you back—that’s not the case. The six months’ worth of paused payments could still count toward your forgiveness requirements.
Borrowers who are repaying federal student loans with one of the income-driven repayment (IDR) plans can have the remainder of the loan forgiven after making payments for 20 to 25 years (depending on the plan). The six months of forbearance from the CARES Act counts toward those payments.
Other periods of economic hardship deferment or when your payment amount is $0 based on your income also count toward forgiveness. This brings up a potential opportunity for student loan relief during coronavirus for borrowers who’ve had their income decrease.
In addition to postponing payments now, during COVID, you may want to update your income with your loan servicer. A lower income can qualify you for a lower monthly payment once you start making payments again. And, the lower payments will continue until the next time you have to recertify your income.
As part of the coronavirus response for student loans, there’s been a six-month postponement for recertification dates before September 30. And, even if your income increases in the interim, you can stick with the lower payment amount and make progress toward IDR forgiveness.
Borrowers who are using an IDR may also be working toward Public Service Loan Forgiveness (PSLF). The PSLF program can lead to loan forgiveness after you make 120 qualifying monthly payments (10 years’ worth). Still, it’s only available on Direct Loans, and you must be working full-time with a qualifying nonprofit or government organization when you make those payments.
The months during forbearance continue to count toward PSLF if you continue to meet all the requirements. If you were laid off, fired, or quit your job during coronavirus, you’ll no longer be a full-time employee and won’t qualify. However, if you were furloughed, you might.
“As long as the employer still considers the borrower to be a full-time ‘employee,’ that should still count towards PSLF,” says Minsky. “It should be no different than taking medical leave or time off (the borrower is still a full-time employee during those periods).” However, he adds that it’s ultimately up to employers and the ED to decide.
Minsky also points out that the 120 qualifying payments don’t have to be consecutive, and you don’t lose your progress. “Also, borrowers can still make qualifying payments towards PSLF if they are working part-time for two or more qualifying public service employers, and their combined working hours are at least 30 hours per week,” says Minsky.
If you have private student loans, or FFEL and Perkins loans that the ED doesn’t hold, the forbearance and 0% interest benefits from the CARES Act don’t apply. Other student loan relief during the COVID pandemic may be available, but it will vary depending on your situation.
“Borrowers would need to contact their loan holders or servicers to see what type of relief may be available,” says Minsky. Many lenders offer temporary forbearance, similar to the CARES Act. However, interest may continue to accrue during the forbearance and could be capitalized (added to your principal balance) when you start making payments again.
You could also use a federal Direct Consolidation Loan to consolidate FFEL or Perkins loans. When you use a Direct Consolidation Loan, you’re paying off your original federal loans to get a new federal loan.
“Consolidating via the Direct loan program can make their loans eligible for benefits under the CARES Act,” says Minsky. “But borrowers should be cautious about doing so since consolidating would restart the clock on the loan repayment term.” You’ll also lose any progress toward loan forgiveness you were making on the loans you consolidate.
While many people are facing financial hardship, some may be able to continue making their student loan payments as usual. Whether or not that’s a good idea can depend on if you’re working toward loan forgiveness.
“If you’re working toward forgiveness, you shouldn’t necessarily make extra payments,” says Minksy. Loan forgiveness discharges the remaining debt, and paying extra now could lead to less debt being forgiven later.
But, says Minsky, “If you’re on a 10- to 25-year payment plan, making extra payments now could help bring down your principal.” The payments will get applied to interest that accrued before March 13, 2020, and then your principal balance. Because the 0% interest rate also began on that day, your entire payment amount might go toward your principal balance.
While the CARES Act rolled out several benefits for federal student loan borrowers, schools, states, private lenders may all release additional options for borrowers and students. There could also be more federal action in the future to provide students with loan relief during the COVID pandemic. Keep on eye on the news and correspondence from your loan service to make sure you’re aware of all the options and can make an informed decision.