The CARES Act Offers Student Loan Relief and Strategic Opportunities

The Cares Act passed last month to provide economic relief in the face of the current pandemic crisis, provides Federal student loan borrowers with a variety of forms of relief.
 
In particular, the biggest impact on student loans is outlined in Section 3513 of the Act which provides for the full suspension of most Federal student loan payments and interest accrual on those loans through September 30, 2020. Servicers of student loans indicate that relief measures were implemented automatically for all borrowers by April 10, 2020, and that no action by the borrower is needed.
 
Because the CARES Act suspends all involuntary collection (including wage garnishments, seizure of tax refunds, and seizures of Social Security benefits) during this 6-month period, even student loan borrowers whose wages are garnished will now be entitled to receive a refund for garnishments made after March 13, 2020 (although the mechanism for receiving refunds is yet unclear).
 
All borrowers of Direct Student Loans and Federal Family Education Loans (FFELs) owned by the U.S. Education Department (USED) are eligible for relief under Section 3513 of the CARES Act. Borrowers can tell what type of loan they have in the name of the loan, which will say whether it is a “Direct” or “FFEL” loan. For borrowers who took out their debt before 2010, when most lending was consolidated under the Direct Loan program, they are more likely to have FFEL loans.
 
It is important to note that not all FFELs are owned by the Federal Government, because loans that are not owned by the Federal government will not qualify for relief provided by the CARES Act. The easiest way to confirm whether loans qualify is for the borrower to log into their loan servicer’s website and to check if the loans have had their interest rates set to 0%. If so, their FFEL loans are owned by the Federal government. If the borrower’s loans still show that payments are due and do not see a 0% interest rate, their loans are owned by a third party and do not qualify for the relief in the CARES act.
 
Also not eligible are most Perkins loans, which are disbursed directly from colleges and universities, and HRSA Loans, which are administered through the Bureau of Health Workforce, a government department separate from the Department of Education.
 
While private loans are not included in the CARES Act, many individual lenders are responding to the situation, offering a wide variety of their own relief efforts. To get an idea of the range of options for borrowers, here are just a few ways this is being handled by different companies:
  • Ernest asks borrowers to contact them to “review your options.” LendKey and Education LoanFinance have similar messages about getting in touch.
  • SoFi has a form on their website for 60 days of forbearance.
  • CommonBond offers natural disaster forbearance, so borrowers can pause their payments through a declared natural disaster but interest will accrue throughout.
  • Citizens Bank does not appear to have any information for current borrowers but does have a prominent message on their website warning prospective new borrowers about the potential downside risk of refinancing private student loans with them during this uncertain time.
The CARES Act states that the suspension of Federal student loan payments will end on September 30, 2020. This means that borrowers will need to begin paying again in October, after the nationwide forbearance ends.
 
During the 6-month relief period, interest will not accrue on any eligible loans and student loan borrowers will also have their principal balances frozen. Starting August 1, 2020, servicers will begin notifying borrowers via email, mail, and phone when the borrower’s normal repayment schedule will resume.
 
Fortunately for borrowers pursuing loan forgiveness via a Federal program (such as, Teache Loan Forgiveness Program) and long term forgiveness via Income Driven Repayment Plans ), the payment periods suspended by the CARES Act relief provision will be included as if payments were made when counting the number of payments made for determining forgiveness.
 
These relief opportunities will affect each borrower differently. All borrowers who qualify for relief should confirm with lenders that the provisions of relief have been applied for them, specifically any forgiveness and any 0% interest rates. for those with private student loan debt, contact your lenders and as for all possible considerations. All of those with Public Student Loan Forgiveness should certainly pause their payments.
 
For borrowers with FFEL or Perkins loans that don’t qualify for CARES Act relief, advisors may want to consider recommending that they consolidate their loans into a Direct Consolidation Loan. Doing so would turn the student loan(s) into one owned by the Federal Government, thereby allowing the borrower to take advantage of the 0% interest and no payments in the coming 6 months. It also would set up the borrower with the loan type most likely to get further relief, if any additional relief comes in future legislation.
 
Freed up cash flow would allow any borrowers who have higher-interest debt, such as credit card or private student loan debt, can use the additional cash flow freed up to reduce those balances during this time. It also allows them to build and emergency fund for time just like these.
 
Not all borrowers will necessarily want to take advantage of the CARES Act. Those who have not been impacted by COVID 19 and who are not seeking loan forgiveness, who have stable income, cash reserves, and no high-interest debt, may simply continue paying their loans and forgo the relief offered by the CARES Act provision to reduce their loan principal as quickly as possible.
Each situations is different. for those with questions please don’t hesitate to reach out. We are here to help.

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