With the coronavirus affecting the income and finances of Americans, the federal government has placed federal student loans in forbearance, which means you won't be dinged for not paying that debt for a few months.
Per the CARES Act, the federal government is suspending all automatic payments until September 30, 2020.
Federal loan lenders will not report to a credit bureau and interest will not be accrued until Oct. 1. All payments made on March 13, will be refunded to the borrower.
But should a person choose to make payments during this time, the full amount will go direct to the loan principal rather than the interest on the loan.
While payments are suspended right now, federal student loan borrowers will be required to continue making payments on Oct. 1.
NBC spoke to financial planners to understand who qualifies for the relief under the Cares Act and the best course of action to take while student loan payments are on pause. In some cases, it makes sense to keep paying but experts also point to the benefits of building up an emergency fund or paying off high-interest debt.
Make sure you know who you are borrowing from
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Under the CARES Act, all federal loan payments are suspended and interest isn't accruing. But it's important to realize this does NOT include private loans or refinanced student loans.
When a borrower refinances their loan, the federal loan is replaced with a new private loan at a new interest rate based on their credit history. A private loan originates from a bank, credit union or an online lender and usually requires a co-signer. Students normally apply for a private loan if their federal loans are maxed out.
According to Anna Helhoski, a student loan expert and writer at NerdWallet, some private banks are offering some form of relief to its borrowers like temporary emergency forbearance.
"Right now lenders are responding by offering additional periods of disaster or emergency forbearance at a range anywhere from 90 days to three months," Helhoski said. "Unlike the federal loan forbearance right now, interest is still going to accrue even if it's an emergency forbearance or disaster forbearance that a private lender is offering."
Banks like Citizen Bank are offering three months forbearance, not included toward a borrower's existing forbearance maximum.
Does this apply to the Public Service Loan Forgiveness program?
Borrowers who qualify for Public Service Loan Forgiveness are required to make 120 monthly payments and provide a yearly certification of their employment in a role of public service. The PSLF program forgives the remaining balance of a borrower's Direct Loans after 120 payments.
According to Spencer Bretts, a financial consultant with Bickling Financial Services and a CFP Board Ambassador, the CARES Act will benefit these borrowers. The suspended months of payments will be considered qualified payments towards their loan forgiveness as long as the borrower is a full-time public service employee.
"As long as you're working and eligible for that PSLF program you're not gonna have to make payments," Bretts said. "They're gonna basically say that you've made those payments. They are giving you credit right now."
Federal forbearance applies to anyone who has a student loan this includes Parent Plus, Graduate Plus borrowers and anyone with an undergraduate direct loan subsidized and unsubsidized loan.
It's a good time to get ahead on payments, if you can
Until Sept. 30, federal student loans will not accrue new interest. If a person’s finances and income is not affected by the coronavirus pandemic, this may be a good time to make payments.
Payments made under normal circumstances are divided, with part of the payment going toward the principal amount and the other to the interest of the loan. Due to the Cares Act, all federal loans will not accrue interest until October and all payments would go directly to the principal.
“This could be an opportunity for you to chip away a little more at that student loan principal, you wouldn’t be collecting interest so you can continue to make payments," Helhoski said.
But in order to continue making payments, the borrower must contact their federal loan servicers to set up payments. During this time, money will not automatically be withdrawn from the account. The borrower must call their servicer to make each payment.
Consider using the pause to take care of other needs and expenses
Over 24 million Americans have applied for unemployment since stay-at-home orders have been issued across the country and for many, the best financial decision may be to keep loans in forbearance and take care of other necessary expenses.
“If you have any kind of high-interest debt, credit card, for example, this would also be a good opportunity to pay that down,” Helhoski said.
While this will not lessen student loan payments, the borrower can resume payments in October.
Living through the coronavirus pandemic is unpredictable and this may be the time set aside some money in case of an emergency.
Use the next six months to create a financial buffer that can keep you financially sound without having to apply for an emergency high-interest loan or a credit card, according to experts. During this time, an emergency fund could be beneficial for unforeseen medical expenses, home expenses and unemployment.
Will student loans be forgiveness?
There are over 44 million borrowers who took out federal student loans in the U.S., making up $1.5 trillion in debt, according to the National Student Loan Data System. As of February 2020, college graduates from public or private institutions owe an average of $32,731. Student debt is the nation’s second-highest debt category behind mortgage debt.
The idea of student loan forgiveness has been an issue in the Democratic campaign for president and Joe Biden says he supports Sen. Elizabeth Warren’s push to cancel a minimum of $10,000 in federal student loan debt during the coronavirus crisis.
Warren’s proposal did not make the final version of the CARES Act and Congress approved a fourth coronavirus relief package on April 23 that also did not include federal loan forgiveness.
Biden has since embraced even more forgiveness of federal undergraduate student debt, for those making under $125,000, CNBC reported.
Loan forgiveness is not something borrowers should plan for in the short term despite the financial crisis, according to Helhoski.
“Instead borrowers should consider the forgiveness options that already exist,” Helhoski said. “Public Service Loan Forgiveness, if they can qualify or enrolling in an income-driven plan that will set payments at a portion of their income and forgive their loans after 20 or 25 years.”
