The coronavirus pandemic has affected student loan borrowers, who are worried about their student loans and who have questions about options for financial relief. Here are the answers.
This article answers questions about the student loan payment pause and interest waiver, the impact of the coronavirus outbreak on student loan interest rates, employer-paid student loan repayment assistance and other student loan benefits.
Student Loan Payment Pause
How do I get a payment pause on my student loans?
The CARES Act includes a 6-month payment pause and interest waiver for certain federal student loans that are owned by the U.S. Department of Education. The payment pause ends on September 30, 2020.
If your federal student loans are eligible, you do not need to do anything to pause the payments on your eligible loans. The payment pause and interest waiver will be automatic. You do not need to apply for the payment pause. However, you should login to your student loan account to confirm that interest has stopped accruing on your student loans.
About seven-eighths of student loans are eligible for the payment pause and interest waiver.
Which student loans are eligible for the payment pause and interest waiver?
Federal Direct Stafford Loans, Federal Direct Parent PLUS Loans, Federal Direct Grad PLUS Loans and Federal Direct Consolidation Loans are eligible for the payment pause and interest waiver.
Federal education loans made under the Federal Family Education Loan Program (FFELP), also known as the guaranteed student loan program, are not eligible for the payment pause and interest waiver. However, FFELP loans are eligible if they were made in 2008-09 and 2009-10 and title was transferred to the U.S. Department of Education through the Ensuring Continued Access to Student Loans Act of 2008 (ECASLA). FFELP loans may also be eligible if the borrower previously defaulted on the loans and title was transferred to the U.S. Department of Education through a guarantee agency.
Federal Perkins Loans are not eligible, even if the loans are held by the federal government.
Private student loans are not eligible.
Are parent loans eligible for the payment pause and interest waiver?
Federal Direct Parent PLUS loans are eligible for both the payment pause and interest waiver. Parent PLUS loans made under the FFEL program are generally not eligible, unless they are ECASLA loans or in default. Private parent loans are not eligible.
Can I convert ineligible loans into eligible loans?
Federal student loans that are not eligible, such as FFELP loans and Federal Perkins loans, may become eligible if they are included in a Federal Direct Consolidation Loan. However, consolidating federal loans may affect the benefits available on these loans, so check with your loan servicer before consolidating them.
Private student loans cannot be converted into eligible loans.
Can ineligible federal student loans receive any financial relief?
Federal education loans that are ineligible for the payment pause may qualify for a different type of payment pause, such as an economic hardship deferment, unemployment deferment or a forbearance. The federal government pays the interest on subsidized loans but not unsubsidized loans during a deferment. The federal government does not pay the interest on any loans during a forbearance.
Deferments and forbearances are each available for up to 3 years in total duration.
You can also switch into an income-driven repayment plan. Income-driven repayment bases the monthly loan payment on your income and family size, as opposed to the amount you owe. If your income is less than 150% of the poverty line, your monthly payment will be zero.
If you are already in an income-driven repayment plan, but you’ve lost your job or your income has decreased, ask the loan servicer to recertify your loans based on your new lower income. You do not need to wait until next year to recertify. The loan servicer may require a copy of documentation of the layoff or change in income.
To get a deferment or forbearance, or to change repayment plans, contact your student loan servicer. If phone lines are busy, try using online tools on the servicer’s web site and the StudentAid.gov web site.
Can private student loans receive any financial relief?
Some lenders are offering special financial relief programs to borrowers affected by COVID-19. Contact your lender for details.
In addition, most private student loans offer forbearances and partial forbearances.
A forbearance is a suspension of the repayment obligation. For private student loans, a forbearance can last for two to three months, with a total duration of up to one year. Interest continues to accrue during a forbearance. If you don’t pay the interest as it accrues, it will be capitalized by adding it to the loan balance, causing compounding (charging of interest on interest).
A partial forbearance is like a forbearance, but requires the borrower to make monthly interest-only payments. Interest-only payments prevents the loan from getting larger.
How long will the payment pause and interest waiver last?
The payment pause and interest waiver will end on September 30, 2020, unless extended by Congress.
Do the paused payments count toward loan forgiveness?
Yes. The paused payments count toward Public Service Loan Forgiveness (PSLF) and the 20/25-year loan forgiveness at the end of an income-driven repayment plan. They also count toward rehabilitation of defaulted federal student loans.
Student Loan Interest Rates and Other Benefits
Will interest rates drop on student loans?
The Federal Reserve Board has cut the Federal Funds Rate to near zero. Interest rates on short-term Treasury Bills have even gone negative. This will affect the interest rates on federal and private student loans.
Interest rates on new federal education loans change each July 1 based on the last 10-year Treasury Note auction in May. Given the results of the most recent auction, interest rates on federal loans are likely to drop by at least 2 percentage points compared with last year.
Borrowers who have old federal student loans cannot refinance them into new federal student loans to benefit from the new lower interest rates.
Borrowers may be able to refinance federal student loans into a private student loan, but will lose the superior benefits of federal student loans, such as the payment pause, interest waiver, economic hardship deferments, unemployment deferments, longer forbearances, death and disability discharges, income-driven repayment and loan forgiveness. (Some private student loans require borrowers to have already graduated or be close to graduation before they will refinance student loans.)
Borrowers of fixed-rate private student loans may be able to refinance them into new fixed-rate private student loans at a lower interest rate. There are no prepayment penalties on student loans. It may take one to three months for the new interest rates on private student loans to fully phase in.
Has anything changed concerning employer-paid student loan repayment assistance programs?
The CARES Act includes a provision to exclude employer-paid student loan repayment assistance (LRAPs) from income this year. Payments made from March 27, 2020 through the end of the year will be tax-free.
The tax-free status applies to employer payments of principal and interest on qualified education loans. However, borrowers will not be able to claim the student loan interest deduction on tax-free interest paid by their employer.
The amount of tax-free student loan repayment assistance, along with employer-paid tuition assistance, is capped at $5,250.
About 8% of employers offer student loan repayment assistance, according to the Society for Human Resource Management (SHRM).
Will the federal government continue to garnish the wages of defaulted federal student loan borrowers?
The U.S. Department of Education has halted collection efforts on defaulted federal student loans, including wage garnishment, the offset of federal income tax refunds and the offset of Social Security benefit payments.
The U.S. Department of Education will refund any amounts collected since March 13, 2020.
What happens if I am unable to fulfill my TEACH Grant or Teacher Loan Forgiveness service requirements because of the pandemic?
If a college graduate is unable to finish this year’s teaching service or was switched from full-time to part-time because the school where they were teaching closed, the partial year and part-time service will count as though it were a full year of full-time service for the TEACH Grant and Teacher Loan Forgiveness programs.
The U.S. Department of Education has also waived the requirement for the years of service to be consecutive in the Teacher Loan Forgiveness program, provided that the borrower resumes teaching after the coronavirus emergency is over.
What happens if I am unable to complete my service in the AmeriCorps program?
Participants in programs of the Corporation for National and Community Service, including the AmeriCorps program, may receive the education award they were due to receive before their service was interrupted by the coronavirus pandemic.
Age limits and terms of service have also been extended to allow participants to continue participating in community service programs after the pandemic ends.
The views of the author of this article do not necessarily represent the views of Gradifi. We make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained here. Readers should consult their own attorneys or other tax or financial advisors to understand the tax, financial and legal consequences of any strategies mentioned in this article.