As the world continues to struggle with the continuing spread of Covid-19, millions of Americans have found themselves in a tremendous amount of uncertainty about their financial situation. In response to the forced shutdown of our economy, Congress passed a historic stimulus package designed to provide much needed relief to individuals and small businesses. Included in the CARES Act is a six-month suspension of Federal student loan payments with no interest accrual on these loans until September 30, 2020.
There are over 45 million borrowers in the US holding a collective $1.6 trillion in student loan debt today. Student loans are now the second highest consumer debt category behind mortgages. The average amount of student loans a borrower currently holds is $32,700 with a monthly payment of $393. The stimulus package effectively suspends payments and interest accrual on any Federal student loans for 6 months until the end of September. This includes direct loans and Federal Family Education Loans (FFELs) owned by the US Education Department.
We have had many questions about how the CARES Act relief provisions will impact student loans and how to benefit from the grace period. By now, most individuals know whether their loans will qualify for the suspended repayment period, but we wanted to share some unique planning opportunities to take advantage of during this unprecedented time.
Private loans and FFELs not owned by the Federal government will not qualify under the stimulus package, but many lenders are responding by offering a variety of their own relief efforts. Some lenders like SoFi are offering 60 days of forbearance and CommonBond is allowing borrowers to pause payments, but interest will still accrue. We recommend contacting your lender to discuss your options.
Wondering how the suspension of Federal loan payments will impact your Loan Forgiveness Program? Fortunately, if you are pursuing loan forgiveness via one of the Federal programs, the period of suspended payments will be included as if payments were made when counting the number of payments made for forgiveness.
Does it make sense for borrowers with Perkins loans or non-qualifying FFEL loans to consolidate into a Direct Consolidation Loan that would then qualify for forbearance? Possibly, but it depends on the specific situation. It is important to note that any unpaid interest that is outstanding on original loans is capitalized during consolidation meaning you pay interest on the unpaid interest. Given the cost of compounding capitalization of interest, this scenario likely will only make sense if loans are in the pay down period and there is little or no outstanding interest at the time of consolidation.
If an individual has income that has been reduced or eliminated, they should clearly stop paying any student loans that are eligible for relief and save or direct their cash flow elsewhere. For example, payments could be made towards higher interest debt, such as credit cards or private loans, to reduce those balances during this time.
If there has been a significant drop in income, an Income-Driven Repayment (IDR) plan may make sense. Filing for recertification of income is allowed if there is a change in circumstances such as job loss or reduced income. This type of plan can result in lower payments while keeping the loan in good standing beyond the September 30th payment suspension deadline. Even once income goes back to previous levels, there could be a period of time where the borrower can pay less than before for a period of time. We recommend waiting until August to decide on an IDR plan in order to maximize the months of reduced payments.
For example, if a borrower who lost their job recertifies in May 2020, they would have to recertify income again in May of 2021. Since the government is allowing $0 payments from now until September, it makes sense to wait to recertify to extend lower payments until September 2021, the next time recertification would be required.
If someone is fortunate to be in a situation where income has remained stable, it may make sense to continue paying loans and forgo the offered six-month relief. Payments can be directed to reduce the loan principal speeding up repayment and reducing interest costs. As well, since there are no due dates for payments during the relief period, there is flexibility to make payments towards higher interest rate loans only.
Planning for couples can be a bit more complex, especially when one spouse may be pursuing PSLF (Public Student Loan Forgiveness). In this case, if both spouses are carrying student loan debt, payments could be directed to the loans of the spouse working to pay off their loan while the qualifying PSLF payments are in the grace period. If a couple owns both Federal and private loans, additional payments could be directed towards the private loan.
Making decisions about student loan repayment, refinancing, and consolidation can be challenging even in a normal environment. The economic uncertainty today only magnifies the looming issue of the crippling student loan debt our country is facing. If you would like to discuss your options for managing your own student loan debt please contact us today for a complimentary introductory meeting.