On March 27th President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law to provide more than $2 trillion in relief to individuals, businesses, and government organizations. The CARES Act created the Paycheck Protection Program for small businesses, extended unemployment compensation to independent contractors and other workers, provided stimulus checks for individuals, paused required minimum distributions for retirement account owners, and suspended federal student loan payments, just to name a few.
March may seem like eons ago but over the last few weeks I’ve talked to more than one person who has not heard about the pause on student loan payments provided by the CARES Act. Even though we are almost five months into this, it’s important for borrowers to understand all of the details.
The pause on student loan payments is technically called an administrative forbearance. This forbearance only applies to loans owned by the Department of Education or federal loans; private loans do not qualify for this special treatment. The Department of Education uses several different servicers for their loans, if you’re unsure if your loan qualifies go to the federal student aid website to see if your servicer is listed.
Not all hope is lost for private borrowers though, some private servicers like Sallie Mae have programs in place to help borrowers affected by COVID, it’s worth picking up the phone and calling your servicer if you’re having trouble making your payments.
What happens and when does it end?
If you do qualify for the pause on payments, you should have seen your monthly payment stop in April even if you are on an automatic payment plan. In addition to automatic payment suspension, all loans now have a zero percent interest rate. You heard that right, ZERO PERCENT INTEREST. This special treatment was supposed to end on September 30th but over the weekend President Trump signed executive orders to continue the pause on payments and zero percent interest for the rest of the year.
While the temporary relief can certainly help those with current cash flow issues, this also presents an opportunity for those fortunate enough to still be able to make their monthly payments. Since loans are not accumulating any interest, 100% of any payment made will go towards paying down principal, saving you interest in the long run.
If you have multiple loans with varying interest rates, it probably makes sense to target the loans with the highest interest rate first. But it’s worth taking into consideration the type of loans you have before choosing a pay-down strategy.
Fixed vs. Variable
First determine whether you have a fixed rate or a variable rate loan. Most federally owned loans have fixed rates, but if you borrowed before 2006 you may have a variable rate. The Fed slashed the Fed Funds rate back in March to a target of 0.00%-0.25%, so those variable student loan rates might be lower than ever after this forbearance period. But keep in mind how much longer you have to pay, if you have several years left you shouldn’t bank on this low interest rate environment continuing for the life of your loan.
Subsidized vs. Unsubsidized
Another important thing to consider is whether you have Direct Subsidized or Direct Unsubsidized Loans. Direct Unsubsidized Loans will still accumulate interest in the event that you go back to school or have another event that would cause you to place your loans in deferment status. Interest accrued on Direct Subsidized Loans, however, is paid by the federal government while loans are in deferment.
It should also be noted that these last few months of administrative forbearance under the CARES Act will still count towards the 120 required monthly payments for those intending to apply for public service loan forgiveness, regardless of whether you pay or not, this will last until September 30th. It’s still unclear whether the new executive order will continue counting non-payments to the end of the year.
With the new executive orders in place there’s still a little bit of time to put a dent in your debt. It might not be enough time to tackle all of it, but if anything, it should get you thinking about your next steps in paying it back.