Curious about the CARES Act and your student loans? Read on.
With troublesome times upon us, you may be worried about how you are going to be able to pay your living expenses and debts, specifically your student loans.
Americans today owe $1.5 trillion in student loan debt as a whole and more than 1.2 million borrowers defaulted on their loans just this past year.
For most of us, our student loan debt is quite substantial and may be taking a significant chunk out of our budget every month. And with the virus wreaking havoc around the world, many of us are worried what’s going to happen if we can’t pay our student loans.
Just recently Congress passed new legislation called the Coronavirus Aid, Relief and Economic Security (CARES) Act that has huge implications for your student loan debt.
The CARES Act and Your Student Loans
Here’s a breakdown of all the benefits people with student loans will receive:
- You won’t have to make payments on your student loans through September 30, 2020.
- Interest will not accrue on these loans during this six-month period
- Collections on defaulted loans will be suspended. Which means that the Government won’t garnish your wages, Social Security or tax refund.
- For those who are in a loan forgiveness program such as the Public Service Loan Forgiveness Program, this short interruption in payments will still count towards your payment requirements for loan forgiveness.
- Employers will be allowed to pay up to $5,250 to employees for their student loans until the end of the year. Such contributions will be tax-free.
- Students who were forced to drop out of school won’t be forced to pay back grants or other aid given to them. In addition, this will not affect their lifetime limits for obtaining subsidized loans or Pell grants going forward.
- Furthermore, this six month hiatus from paying back the loans is automatic so you don't have to call in and request it as was previously required. It should show up automatically in your account and you should receive warnings when it is about to expire.
However, I must note that this legislation doesn't apply to ALL student loans. Do NOT just stop paying on your loans without confirming whether your loans qualify under the new legislation.
Also, if possible I encourage you to take advantage of this temporary relief to make some smart financial moves that can put you out ahead in the coming months. I give some tips on how to do this below.
What this bill does not include.
This bill does not include having any amount of your student loans forgiven “for free”. The government is not forgiving part of your loans.
Although Senate Democrats had proposed forgiving at least $10,000 of student loan debt of every borrower during this crisis that proposition did not go through.
So you will still be responsible for paying the full amount back later. However, you will get a reprieve in having to do so for these next six months.
What Loans Do Not Qualify Under CARES?
Before you go jumping for joy and toasting to the fact that you are free from student loan debt (albeit temporarily), pause. While it covers some student loans, mainly some federal loans, this bill actually does not cover ALL student loans.
Let’s take a look at some of the loans that are NOT covered by the new legislation.
Private Student Loans
It may of course go without saying but private student loans are not covered by the bill and you will be required to make your regular payments.
Some Federally Guaranteed Loans
You may also want to check some of your Federal loans as the Perkins Loans do not seemed to be covered as well. Nor are loans from state agencies or older Federal Family Educational loans (FFEL) that weren’t issued by the US Department of Education.
As always check with your loan providers to be sure that your loans qualify. Each provider is different. If your loan doesn’t meet the requirements for the postponement, your provider may offer other programs similar to the new bill.
One thing that’s for sure, this is definitely not the time to skip out on making those loan payments as that can be disastrous for your credit.
What to Do If Your Loans Don’t Qualify?
If your loans do not qualify, make sure you keep up payments regularly. If this is really not possible for you and you are under serious financial strain, you can call your provider, explain the situation, and request a deferment or a forbearance. It is possible to apply online as well.
Loan Deferment
A deferment is a plan that reduces the amount of or postpones the repayment of your loan temporarily. Your financial situation and the kind of deferment you are applying for determine the length of the postponement.
It may be more desirable to apply for a deferment if you have federally subsidized loans or a Perkins loan as these don’t accrue interest while in deferment.
In order to get a deferment, your provider may require that you have proof of hard times or unemployment so be prepared with key financial statements and documents.
Loan Forbearance
A forbearance, like a deferment, gives you the option to delay repayment of your loans. However, even though you aren’t required to make payments on your loans while they are in forbearance, your loans will still accrue interest.
Because of this, you may want to consider paying at least the interest during this time. There are limits as to how long your loans can be in forbearance. For federal loans, it’s 12 months. Once that time is up you will have to apply for another forbearance period.
Although it will be noted in your credit report, requesting a forbearance or a deferment will not have a negative affect on your credit score. Also worth noting is that deferments or forbearances can be applied retroactively.
So as long as you have not defaulted, you can apply the deferment/forbearance retroactively on your missed payments.
If none of those options sound appealing, you could also enroll in an income-driven repayment plan. This plan simply uses your income to decide on your monthly payments.
It is based on your family size and is capped at 10% or 15% of your discretionary income. Then after 20 or 25 years of consistent monthly payments, the remaining amount will be forgiven.
But you will be required to pay taxes on the amount forgiven.
How to Use This New Legislation to Your Benefit
This new legislations could not have come at a better time for people struggling to make ends meet due to pay cuts or sudden unemployment.
And for those who are lucky enough to be able to work from home this affords you the rare chance to pay on your loans while it’s not accruing interest.
By doing so your money will be applied directly to your principle, which will reduce the amount of interest you pay in the long run.
While there are downsides to being quarantined and being forced to work from home, it does have its good points. First and foremost of which is being able to spend more time with your loved ones and fur babies.
Furthermore, you now can catch up on some much needed rest and relaxation. Following a close third behind these is the amount of money you are going to save just by not going outside.
I’m willing to bet you are saving a ton of money that would’ve otherwise been spent on gas, eating out (for lunch and dinner), and your daily soy chai lattes from Starbucks.
Not to mention the money you save because you no longer have to buy that pick me up double-scoop ice cream cone from Baskin Robbins after a long hard day of work.
The beauty of all this...
The beauty of all this, for those who still have monthly income, is that all of that extra money you are saving now is like a bonus and can be used to pay off your debt.
You can use it to double up payments on your credit card debt or simply put more towards your student loan debt. Or do both. Take your pick. The choice is yours. And what a good choice to have it is.
Was this post helpful? Let me know in the comments below! Also, let me know what other topics you would like me to cover! I know student loan debt is a huge burden to most so this bill couldn’t have come at a better time. Stay safe everyone!
Do you want to know more about the CARES Act and how it affects you? Check out this article on the CARES Act, you, your life, and your money.
For those interested in seeing the bill in its entirety, check that out here (pdf).