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If you've lost income due to the COVID-19 pandemic, making payments on your student loans may be challenging, if not impossible. Fortunately, legislators and student loan companies are stepping up to provide some relief to affected borrowers.
Here's everything you need to know about how to get help with your student loans and how to choose the right path for you.
How the CARES Act Helps Federal Loan Borrowers
Signed into law in late March, the Coronavirus Aid, Relief and Economic Security (CARES) Act provides roughly $2.2 trillion in relief for people and businesses that have been affected by the COVID-19 crisis.
For many student loan borrowers, that relief comes in the form of suspended payments through September 30, 2020. To qualify, you need to have direct loans or Federal Family Education Loans (FFELs) that are held by the federal government.
If your loans are eligible, the benefit occurs automatically—no need to reach out to your loan servicer to opt in. As part of the stimulus package for federal student loan borrowers:
- Involuntary collections of student loan debt, including wage garnishments, Social Security garnishments and tax refund offsets, are suspended.
- Interest will not accrue during the suspension period.
- If you're on an income-driven repayment plan or working toward Public Service Loan Forgiveness, your suspended payments will count toward the requirements of those programs.
- Suspended payments will be reported to the national credit bureaus as though they were on-time payments.
Unfortunately, the stimulus package excludes roughly 12% of federal student loans, according to the Institute of College Access & Success. These exclusions include Perkins loans (which are campus-based) and older FFEL loans held by commercial lenders. In addition, it doesn't include private student loans, which make up almost 8% of all student loan debt in the U.S., according to data and analytics firm MeasureOne.
How Employers Can Help With Student Loans
Eight percent of organizations in the U.S. offer some form of student loan repayment assistance, says the Society for Human Resource Management. If you work for one of those companies, you may already be receiving assistance with paying down your debt.
If you're not, now may be a good time to speak with your human resources department. Employers already receive a tax break for offering tuition assistance to their employees—they can contribute up to $5,250 annually on a tax-free basis.
But now, because of the CARES Act, that tax break has extended to student loan repayment assistance as well through the end of 2020. In other words, your employer can help make up to $5,250 in payments toward your student loans this year, and it will be tax-free for both of you.
Just keep in mind that the $5,250 limit is shared between tuition reimbursement and student loan repayment assistance, so if you're taking advantage of both, there are some limitations.
How Your Lenders Can Help With Your Student Loans
If you have student loans that don't qualify for payment suspension under the CARES Act, you may be able to get some help from your lender. Many private lenders offer forbearance plans that can pause your student loan payments for a predetermined period of time.
Unlike the CARES Act suspension, forbearance with a private lender won't stop interest from accruing. However, it may still be worth it to pay a little more later in exchange for financial relief right now.
As of April 2020, these are policies from some private lenders that can help point you in the right direction. Check with your lenders, as policies could change.
- Advantage Education Loan: Provides forbearance for borrowers experiencing economic hardship for up to three months at a time.
- Ascent Student Loans: Up to 24 months of forbearance in increments of one to three months.
- Citizens Bank: Borrowers can get up to 12 months of forbearance.
- CommonBond: The lender offers forbearance for up to 24 months.
- College Ave: Offers forbearance on a case-by-case basis.
- Discover: Can temporarily reduce your interest rate for six months or grant forbearance for up to 12 months in small increments.
- Earnest: Provides up to 12 months of forbearance.
- Education Loan Finance: Offers up to 12 months of forbearance for economic hardship.
- First Republic Bank: No forbearance program, but call the lender to discuss potential options.
- Laurel Road: Borrowers can get forbearance in three-month increments, up to 12 months total.
- LendKey: Forbearance options range up to 18 months, depending on the type of loan you have.
- Navy Federal Credit Union: Provides forbearance in 12-month increments, up to three years total.
- Sallie Mae: Student loan borrowers can get up to 12 months of forbearance in three-month increments.
- SoFi: Offers borrowers forbearance in three-month increments, up to 12 months total.
- Wells Fargo: Borrowers in need can get up to six months of hardship payment relief.
Keep in mind that these are the standard policies for each private lender. Some may be providing special forbearance policies for the current situation. Call your lender to find out what options are available to you.
Can Refinancing Your Student Loans Help?
During the coronavirus crisis, refinancing can also make it possible to switch to a lender that has more generous forbearance options than what your current lender offers.
Just keep in mind that if you refinance federal student loans with a private lender, you'll lose all the benefits that the Department of Education provides, including payment suspension under the CARES Act.
Also, refinancing student loans typically requires you to have a stellar credit history and a solid income source. If you aren't eligible on your own, you may be able to improve your chances by applying with a cosigner. Take some time to run the numbers to determine whether refinancing is right for you.
Should You Get on an Income-Driven Repayment Plan?
If you have federal student loans, you don't have to worry about making any payments until the end of September. But if you anticipate the COVID-19 pandemic will have a lasting impact on your financial situation, it may make sense to apply for an income-driven repayment plan.
Income-driven repayment plans reduce your monthly payment to a percentage—usually 10% to 20%, depending on the plan—of your discretionary income. They also extend your repayment term to 20 or 25 years. Once you've completed your repayment plan (which includes the suspended payments for the next handful of months), the remaining balance will be forgiven.
Before you apply for an income-driven repayment plan, it's important to note that while your payment can be lower right now, especially if you've lost some income, you have to recertify your income every year. That means that your payments can go up—and with some plans, they can even exceed your current monthly payment amount.
Also, while these plans will reduce your monthly payment, you'll pay more in interest over the life of your loans, and you'll be indebted for at least twice as long since 10 years is the normal federal student loan term. If the idea of having your remaining balance forgiven after 20 or 25 years is appealing, know that that amount will be considered taxable income, which can result in a big tax bill.
So again, take your time to consider your options. Because you don't have to worry about payments for a while, getting on an income-driven repayment plan only makes sense if it's the right move for the long run to prevent default.
Should You Take Action Now?
If you haven't been affected financially by the COVID-19 pandemic, you may wonder if you even need to take any steps to get help with your student loans.
Without knowing how long the U.S. economy will be affected by the crisis and how it could impact you in future months, it may be tempting to request help now as a way to prepare for potential financial hardship later. You could set aside the money you're not paying on your loans in savings, and pay it all toward your loans later if you don't need the money after all. However, if you don't have reason to believe you may be economically affected by COVID-19, it's probably best to continue making loan payments.
Of course, some private lenders may not offer forbearance unless you're experiencing economic need right now. Consider your situation, and determine what is the right move for you.