Covid-19: What student loan borrowers should know

The Coronavirus will have far-reaching impacts for us all. On March 20, 2020 the Department of Education issued a press release that clarified comments made by the President during the emergency declaration on March 13, 2020. 

Written by Jantz Hoffman & Heather Jarvis

The initial announcement did not provide any specific detail on the student loan interest suspension stated by the President.

Now that the Department of Education has provided further details, here's what student loan borrowers need to know about managing student loan debt during this difficult time. Keep in mind that this is a very fluid situation, and congress is still working on a broad economic relief package that may extend further benefits to student loan borrowers.

Consider Whether You Need to Apply for a Forbearance and Suspend Auto-Payments

Many borrowers have authorized their loan servicing companies to automatically withdraw payments on a monthly basis. If you need to stop making payments for a while, contact the company that services your loans right away. Your loan servicer will allow you to temporarily stop making payments on your loans through a deferment or forbearance.

Staying in touch with your loan servicer helps prevent the negative consequences of delinquency or default. Per the press release, ED has directed all loan servicers to automatically grant an administrative forbearance to any borrower requesting payment relief as well as any borrower who is more than 30 days delinquent. Please be cautioned that this is only for Federally held loans, so Perkins loans, HRSA loans, private loans, or FFEL loans will not be provided this option.

Loan servicing companies don't always act immediately. If you don't have enough in the bank to cover your payment while you apply for a forbearance, you can avoid overdraft fees by withdrawing your consent to auto-payments (most servicing companies let you do this online).

How to find your loan servicing company

If you aren't sure which company services your loans, you can log in and look that up here: https://studentaid.gov/ Note that a Federal Perkins Loan is a campus-based federal loan, so if you have Perkins loans, you'll need to reach out to the school you attended when you borrowed the Perkins Loan.

Private student loan lenders might work with you to postpone payments, but you don't have the same rights to deferment and forbearance with private loans. That said, during these unusual times, it makes sense to request accommodations.

Consider Applying for Income-Driven Repayment or Recalculation of Your Payment Amount

If you are enrolled in a standard term repayment plan, you may be able to change to a different repayment plan that would give you a lower monthly payment. Federal student loans allow for income-driven repayment plans that set payments at a percentage of income. To learn more about income-driven repayment, visit https://studentaid.gov/idr.


If you are currently on an income-driven repayment plan and you've had a significant change in income, you can ask to have your monthly payment recalculated at any time. Apply for income-driven repayment or to have your payment amount recalculated based on any reduction in income you may be experiencing at https://studentaid.gov/

Recently Announced Interest Waiver for Federally Held Student Loans


The President announced on Friday, March 13, 2020, that interest on federally held student loans would be suspended indefinitely and effective immediately. Typically, "federally held" means those federal student loans that are Direct Loans, including Direct Subsidized, Direct Unsubsidized, Direct Graduate PLUS, Direct Parent PLUS, and Direct Consolidation loans, but does not include most older federal loans from the FFEL program. Private loans will not qualify.

The press release indicates that the interest waiver period is expected to be in place for at least 60 days and may be extended further. The interest waiver will be automatic and retroactive to March 13, 2020.

For this reason, no application is expected to be necessary. While interest suspension may allow borrowers to postpone repayment without accruing additional interest during these uncertain times, it may not be the best option.

The time in forbearance would not count toward PSLF or the maximum repayment periods of IDR plans. Further, it's not clear if requesting and being granted the administrative forbearance would lead to capitalization of previously accumulated interest. For most borrowers that can do so, they should continue to make their regularly scheduled payments.

For those that have experienced income losses, they should first look to enroll in an IDR plan or recertify their income to have their payment reduced. Forbearance periods may need to requested in some scenarios; however they should be used with caution and only when other repayment options are unaffordable.

It is being reported in many places that any payments made during this interest-free period will be applied to the principal balance; however, for many borrowers, this is not the chase.

Borrowers that have accumulated interest from previous periods in IDR plans, deferment, or forbearance will first have to repay the previously charged interest before they can make principal payments on a given loan. Student loan borrowers should check their accounts periodically and look for updates over time. If you can afford to continue making payments, the interest rate waiver is a unique opportunity to reduce your principal balance on loans that do not have any accumulated unpaid interest.


Public Service Loan Forgiveness Requires 120 "Qualifying" Payments

Borrowers working toward Public Service Loan Forgiveness (PSLF) should understand that if you don't make a payment for a month (for example, because you choose deferment or forbearance), that month will not count toward PSLF. But qualifying payments do not need to be consecutive, and you will not lose credit for payments that you've already made. Borrowers seeking PSLF are generally enrolled in income-driven repayment plans. If you've had a reduction in income, you can recertify your income early, to reduce required payments due to a drop in income.

If you are using paid sick leave or other leave time, your employer is permitted to consider that time as hours worked for meeting the full-time requirement of PSLF. If your public service employer does not consider you to be working full-time during this period, then you cannot make payments that count toward PSLF. To learn more about PSLF, visit https://studentaid.gov/publicservice.


Advocate for Additional Relief

Advocates for student loan borrowers, including the National Consumer Law Center, are urging policymakers to take additional actions such as a implementing a moratorium on student loan payments during the public health emergency. The National Consumer Law Center recommends that once borrowers who are in an income-driven repayment (IDR) or standard ten-year plan resume payments, the months spent under the moratorium should be credited towards either IDR or PSLF forgiveness.

Consumer advocates recommend that wage garnishment, social security offset, and tax refund offset should be stopped immediately to protect those most financially vulnerable to the impact of the Coronavirus.


The CSLP program is a professional education program for financial advisors who wish to provide information and accurate advice to clients with student loans. Get started or learn more here. 


 

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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