Financial relief for student loans during the COVID-19 pandemic
Over the last few years, there has been much debate and disagreement about whether the student loan bubble will pop. The coronavirus pandemic has significantly shifted this discussion. As the U.S. struggles with an imminent recession, as economists are warning recovery could “take years.”
In response to the current situation, the federal government recently passed a $2 trillion relief package dubbed the “CARES Act” (Coronavirus Aid, Relief and Economic Security Act) which earmarked $14 billion for higher education.
Students can defer their federal education loans
The government’s relief package provides short-term student loan relief for millions of borrowers who took out federally-owned student loans held by the U.S. Department of Education.
- Between March 13 and September 30, 2020 student loan payments are deferred without penalty.
- Interest on federally-owned student loans is frozen during this time frame with interest rates set to 0%.
- People with garnishment of wages, tax refunds, and Social Security to pay back student loans will receive a pause until September 30.
- Suspended months do qualify for Public Service Loan Forgiveness (even if payments aren’t made).
- Borrowers aren’t required to request the extension; it’ll be automatically applied to their accounts.
Students who want to continue to repay their federally-owned student loans may also elect to do so, either in full or partial payments. Any payments made will first go towards paying down interest accrued prior to March 13, and subsequent payments will be applied to the principal balance.
Who doesn’t qualify for federal relief
Millions will benefit from this postponement of student debt (the majority of borrowers have federal loans), but not everyone will get this reprieve. People who have taken out private student loans or FFEL-program federal loans and Perkins federal loans owned by private lenders or colleges and universities won't qualify under the stipulations of the CARES Act.
What these borrowers can elect to do is consolidate their loans into a Direct Consolidation Loan to become eligible for the 0% interest rate. Before going this route, borrowers should make certain the new long-term interest rate generated isn't higher than the rate associated with current student loans. Borrowers should talk to their student loan servicer and then run the math to ensure new rates don’t create higher debt by making a switch. Another option is to ask lenders if other available hardship programs are available.
Not a loan forgiveness program
The CARES Act doesn’t include student loan forgiveness, it is a temporary delay to allow people flexibility during this global health crisis. Once September 30 arrives, this reprieve expires and borrowers are expected to resume their regular payments. If not, they could go into default and put a negative mark on their credit score.
The coronavirus pandemic has left many people feeling uncertain about their financial futures and wondering how hardships now will affect their ability to pay bills or take out loans once the crisis passes. It is possible to keep your credit score in good standing. Contact PRBC today to learn more about how we’re responding to the pandemic and how we can assist you to ensure your credit score remains intact.