As many people are already aware, on March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act, also known as the “CARES” Act. This law provides for economic relief to American businesses and residents, and it is the largest government stimulus package ever passed by Congress. In addition, the CARES Act includes a great deal of student loan relief because of COVID-19.
Legislators understand that student debt borrowers have been substantially impacted by the ongoing COVID-19 pandemic. Indeed, many student loan borrowers have lost their jobs or had their hours cut, and this makes it difficult for them to make student loan payments. Luckily, there is student loan relief because of COVID-19, but it is important that student debt borrowers are strategic when taking advantage of these benefits. It should also be noted that these benefits generally only apply to government loans and not loans that are issued through a private lender (or refinanced loans in most circumstances).
Probably the most important student loan relief because of COVID-19 is that government student loan payments and interest are suspended until September 30, 2020. Because of this suspension, it makes almost no sense to pay student loans before this time expires. If you have auto-pay set up for your student loans, you should disable this function so that student loan payments are not accidentally deducted from your bank account during this time.
Since interest and student loans payments are suspended until September 30, 2020, there are a few strategies you can employ to have a substantial impact on your student loans. If financially possible, you can save up all of the money you would have paid on student loans during this time period. Then, when the suspension ends, you can make one huge payment on your student loans, which will impact the amount of interest that accrues on your student loans from that point forward.
Of course, Congress may pass additional legislation providing student loan relief because of COVID-19. In addition, some borrowers will lose their jobs during this time or otherwise will not be able to pool their money and implement this strategy. Nevertheless, this approach could take the most advantage of the current suspension on payments and interest for federal student loans.
In addition, the CARES Act provides some relief for borrowers who are on income-driven repayment plans. As mentioned in prior articles, income-driven repayment plans allow borrowers to pay a certain percentage of their income to student loans each month and have their student loans forgiven after a certain period of time, normally 10 to 20 years. The CARES Act is providing borrowers on this plan a six-month grace period during which they will be counted as making timely payments under this plan even if they do not submit student loan payments.
If you are in a public service field and are taking advantage of Public Service Loan Forgiveness, this is a huge advantage. Borrowers on these plans can have their loans forgiven after 120 timely monthly payments, and the CARES act basically ensures that you have six “free” months on this plan. If you haven’t already enrolled in an income-driven repayment plan, you should seriously consider enrolling in this plan to take advantage of this benefit.
The CARES Act also includes other student loan relief because of COVID-19 in the form of help from employers. The law allows employers to pay up to $5,250 of an employee’s student loans without the payment counting as taxable income (although it is unclear at this time if this payment would be subject to FICA tax). It is uncertain if employers will take advantage of this benefit, since many companies are strapped for cash in the present environment because of the COVID-19 pandemic. It seems as if employers can deduct such payments from their profit and lower their taxable income through such payments, and this may motivate companies to make such payments. Nevertheless, such federal benefits may change the culture around student loans and make it more likely that employers will provide student loan help as an employee benefit in the future.
There are a few reasons to be cautious about the student loan relief because of COVID-19, and additional research and clarification is needed on a number of points. For one, some lenders offer rate reductions for consistent and timely student loan payments. Borrowers need to be careful that such incentive programs are not affected by protections enacted by the CARES Act. In addition, the federal student loan relief because of COVID-19 needs to be considered along with the efforts of many state governments to provide help to borrowers.
Many states have halted student loan payments and collection efforts that may be pursued by lenders. State action on this subject is changing every day, and people should investigate whether they are entitled to state relief from paying student loans (as well as mortgages and other expenses). It is also possible that state and federal relief will be expanded depending on the severity of the COVID-19 pandemic.
In the end, COVID-19 has created a number of financial difficulties for million of Americans, including numerous student loan borrowers. Nevertheless, Congress has enacted student loan relief because of COVID-19, and many states have also provided assistance to student debt borrowers who live in those states. If you keep in mind all of the state and federal benefits for student loans borrowers, it can be easier to deal with economic difficulties due to the COVID-19 pandemic.