The post was written by Travis Hornsby, founder of Student Loan Planner.
The coronavirus pandemic has taken a significant toll on people all across the globe, stealing lives and causing unforeseen challenges that we’ll be dealing with for years to come.
As part of the federal government’s response, the Coronavirus Aid, Relief and Economic Security (CARES) Act was passed to provide varying levels of financial support. Fortunately, student loan borrowers were included in these unprecedented relief measures.
Here’s how student loans have been impacted by COVID-19 so far and what to expect as you head into this new academic year.
How the CARES Act Has Affected Student Loans
The CARES Act provided historical intervention for struggling federal student loan borrowers.
As of March 13, 2020, federal student loan payments are suspended, and interest rates are frozen at 0%. Both of these provisions are automatic and will remain in effect through September 30, 2020.
Additionally, borrowers who made a student loan payment or had their account auto-debited during this period can request a refund by contacting their lender. It may take several weeks to receive your refund, but it only takes a few minutes of your time to initiate the process.
Eligible Student Loans
Most student loans qualify for the CARES Act interest waiver and administrative forbearance. But millions of borrowers were still left behind.
Only federal student loans owned by the Department of Education are eligible. The types of student loans that are included are:
- Defaulted and non-defaulted Direct Loans
- Defaulted and non-defaulted Federal Family Education Loans (FFEL)
- Defaulted and non-defaulted Federal Perkins Loans
- Defaulted Health Education Assistance Loans (HEAL)
But FFEL and HEAL loans that are owned by commercial lenders don’t qualify. Private student loans or Federal Perkins Loans owned by your school are also ineligible for federal COVID-19 relief benefits.
Should You Continue Making Payments?
If your student loans fall under the CARES Act, you may wonder if you should continue making normal monthly payments or put more funds toward your loans during the 0% interest period.
Many financial “experts” are advising borrowers to pay extra toward their student loans right now. But I couldn’t disagree more. And here’s why:
- Many student loan borrowers have lost their jobs or seen a significant reduction in their income due to this pandemic. Their student loan payment could be a necessity to help pay for other immediate bills and expenses.
- Even if you’ve kept your job thus far, you could be part of a strategic layoff in the future. In which case, you’ll need to tap into your savings — which could be padded right now with your student loan payments.
- All non-payments during the forbearance period count toward loan forgiveness. If you’re working toward Public Service Loan Forgiveness (PSLF) or on track for forgiveness through an income-driven repayment (IDR) plan, you’ll still receive credit for qualifying payments during these six months of forbearance.
The only time you should consider making payments during the CARES Act forbearance period is if you aren’t pursuing forgiveness and plan to pay your student loans in full.
And even then, it’s vital that you prioritize an emergency fund that covers at least a year’s worth of expenses. You should also consider maxing out your retirement contributions and putting at least $100 toward a non-retirement savings account before you look at paying down your student loans.
If you plan to continue making loan payments, consider refinancing your student loans once the interest waiver expires — but not right now.
Take full advantage of the 0% interest rate, and then plan to refinance once rates drop back down in the future. This way you can aggressively pay off the remainder of your student loans with the least amount of interest possible.
What Future Student Loan Borrowers Can Expect
Borrowers seeking new student loans for the 2020-2021 academic year are going to be able to borrow at the lowest level in over a decade.
In fact, undergraduate interest rates are going to be at a historical low. And graduate interest rates will be at their lowest level since the early 2000s.
Starting July 1, 2020, federal student loan interest rates will be:
- 75% for Stafford Subsidized loans.
- 30% for Stafford Unsubsidized loans.
- 30% for Grad PLUS loans.
- 30% for Parent PLUS loans taken out in the parent’s name.
Because these new federal student loan interest rates will be ultra-low, new borrowers may not need to refinance these particular loans in the future. Especially given that federal loans also have certain protections that far exceed offerings from private lenders. This includes benefits like access to income-driven repayment (IDR) plans, and hardship options like deferment or forbearance.
Keep in mind that student loan borrowers will also incur various origination fees as an additional cost. An origination fee is a common upfront fee that is charged for processing the loan. It’s added to the total balance and then amortized accordingly.
Stafford loans will have around a 1% origination fee for the upcoming academic year. While GRAD PLUS and Parent PLUS loans will be around 4.25%.
Borrowers should factor their interest rate and origination fees to understand the full cost of their student loans.
Will Previous Student Loans Qualify For The New Interest Rates?
Unfortunately, these low rates are only available to students who are borrowing for the 2020-2021 school year. So, any loans that were previously taken out will remain at their original interest rate.
The only way to lower your interest rate is to refinance your student loans with a private lender.
Alternatively, you can explore federal repayment plans if your income is relatively low compared to your student debt. IDR plans, like Revised Pay as You Earn (REPAYE), can lower your monthly payment and get you on track for student loan forgiveness after 20-25 years of repayment.
Will There Be Additional Relief Measures For Student Loan Borrowers?
Legislators are continuing to discuss financial relief measures for student loans after COVID-19. And higher education interest groups are pushing for further suspension of student loan interest and payments.
Several proposals have been put forth for consideration for additional loan forgiveness and assistance programs. Only time will tell which additional relief measures, if any, become a reality for student loan borrowers.
Private student loan borrowers should contact their lender to discuss available relief programs. Some lenders are offering three months or more of paused payments. But you’ll need to directly communicate your financial situation to your lender to access assistance.
We have no idea how long this pandemic or its economic repercussions will last. Use every financial relief measure at your disposal to ensure you’re prepared to withstand this time of uncertainty.