U.S. Bill Analysis: The CARES Act

On March 25th, the U.S. Senate passed the Cares Act, which among its historic relief, provided some much-needed assistance for student loan borrowers.

Below are the provisions of the bill

that directly affect student loan repayment, followed by some analysis regarding the provisions.

Bill Text


S.E.C. 4513. Temporary relief for federal student loan borrowers. 

(a) In general.—The Secretary shall suspend all payments due for loans made under part D of title IV of the Higher Education Act of 1965 (20 U.S.C. 1087a et seq.) for 3 months.

(b) No accrual of interest.—Notwithstanding any other provision of the Higher Education Act of 1965 (20 U.S.C. 1001 et seq.), interest shall not accrue on a loan described under subsection (a) for which payment was suspended for the period of the suspension.

(c) Consideration of payments.—The Secretary shall deem each month for which a loan payment was suspended under this section as if the borrower of the loan had made a payment for the purpose of any loan forgiveness program authorized under part D of title IV of the Higher Education Act of 1965 (20 U.S.C. 1087a et seq.) for which the borrower would have otherwise qualified.

(d) Extension.—The Secretary may extend the period of suspension described under subsection (a) for an additional 3 months. 

Section A – Allows for the suspension of all payments on Direct Loans for 3 months.  

Analysis:  

This is automatic. All Direct Loan borrowers, regardless of their payment plan will have their required payments suspended. Borrowers have the ability to make payments if they desire but will not be required to. 

This relief is only extended to Direct Loans, so borrowers that have private loans, FFEL Loans, Perkins Loan, HEEL, or HRSA loans will have to continue to make payments due or contact their servicers to arrange for a forbearance or other payment relief.

Additionally, borrowers that are in IDR plans will still be required to complete an annual recertification during this period. It will be easy for many borrowers to forget about their loans if they have no payments due, so make sure you keep an eye on those requests.

Failure to recertify annually triggers capitalization of interest and much higher payments once the suspension period is over. If you want to double-check when your recertification is due, log in at studentaid.gov.

It’s unclear if the servicers will be processing requests for re-calculations of payments due to lost income during this period. If they are, and you experience a drop in income, consider recertifying early as that could extend additional reduced payments to you beyond the 3 months.  

Section B – Allows for the waiver of interest

Analysis:  

On all loans that qualify for a suspension of payments under section A, no interest will accrue during the period payments are suspended. Some media reports have erroneously indicated that borrowers that choose to make payments during the period of waived interest will have their entire payment directed to their principal balance; however, that will only be the case if there is no outstanding unpaid accrued interest.  

According to the most recent data from E.D., just over 50% of borrowers are not in repayment on their loans. Of borrowers in repayment on their debt, 2/3 of that debt is being repaid in an IDR plan. Because IDR allows for negative amortization, those borrowers may have outstanding unpaid accrued interest. So payments made during this period will not be applied to principal and instead will be credited toward previously accumulated unpaid interest.  

The only borrowers that will have a principal reduction are those that do not have outstanding interest—those most likely to be on traditional repayment plans. Borrowers that have the means to do so and are planning to repay their loans should take advantage of this window as they can make larger payments that will significantly reduce the total interest paid on their debt.

Section C – Mandates that the period of time that payments are suspended will be considered as qualifying for forgiveness, including Teacher Loan Forgiveness and Public Service Loan Forgiveness.   

Analysis:  

Borrowers in IDR plans and borrowers that are planning to benefit from PSLF are best served not making payments during this suspension period, even if they have the means to do so. The waiver of interest and suspension of payments will likely cause borrowers to have less debt discharged than previously anticipated. For borrowers expecting a tax liability from discharged debt, this should slightly reduce that expected liability, although the amount is likely negligible.  

For borrowers that are hoping to benefit from temporary PSLF, this period could be very beneficial. Many borrowers have found themselves in the wrong repayment plans for PSLF after ten years of making payments in a qualifying repayment plan. Now, they may find themselves eligible for temporary PSLF after just one month of the payment being waived.  

Section D – Gives E.D. the authority to extend the provisions for an additional 3 months.

Analysis:  No analysis needed.


Actionable items

For borrowers and their advisors

  1. Determine what types of loans you have (www.studentaid.gov)
     
    1. Only federal loans are listed here
    2. Only Direct Loans are provided relief, so cautiously consider consolidation
      1. Direct Consolidations will take 60 days or longer
      2. Consolidation could erase payment history toward maximum repayment terms
      3. Consolidation could prevent Perkins cancelation
      4.  Determine if you have accrued interest, how much, and on which loans
    3. Some loans may have accrued interest, while others may not.  
    4. Making payments on loans with no accrued interest will reduce future interest charges.
  2.  Assess whether you are likely to benefit from forgiveness
     
    1. If PSLF is likely:
      1. You likely don’t want to make payments
      2. You likely want to focus your dollars on other debts/goals
    2. If PSLF is unlikely:
      1.  Consider if forgiveness from the maximum repayment terms in IDR plans is viable and valuable.  
        1. If so you likely don’t want to make payments during this period
          1. You may have to make payments on your FEEL loans (fractional portion of the IBR payment). 
        2. If unlikely, consider making payments
  3.  Avoid Forbearance
     
    1. If a borrower has a loss of income and payments due on FFEL loans, consider IBR before requesting a forbearance.  
  4. Private loans do not have any mandated relief
    1. Contact your lender and ask what sort of reprieve they can provide.

Financial Advisors Alert

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Jantz Hoffman, MBA

Written by Jantz Hoffman, MBA

Mr. Hoffman is a Registered Investment Advisor and has been assisting clients with student debt since 2010. He has appeared on PBS Nightly Business Report and been cited in the NY Times as well as other publications as an expert in student loan repayment. Mr. Hoffman received a bachelor’s degree from Humboldt State University and a master’s degree in business from Colorado State University.

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