If you watched President Trump’s press conference on March 13th, when he declared a national emergency due to the Coronavirus Pandemic and you have student loans, you may have taken interest in one of his statements. After introducing the members of the task force created to fight the Coronavirus, he mentioned waiving interest on all student loans held by the federal government agencies to help American students and their families. After the press conference, we learned that this address was the first time the U.S. Department of Education officials had heard of this idea.
We waited a week in anticipation of a clear direction. Finally, the U.S. Department of Education issued a press release on March 20th, confirming that interest would be waived during the national emergency. The press release said, “All borrowers with federally held student loans will automatically have their interest rates set to 0% for a period of at least 60 days. In addition, each of these borrowers will have the option to suspend their payments for at least two months to allow them greater flexibility during the national emergency.”
This announcement was followed by the CARES Act which was signed into law on March 27th and has raised many new questions and caused additional confusion for borrowers. We wanted to take the time to answer some of the questions with the information we currently have. We expect over the next few weeks that the U.S. Department of Education and loan servicers will continue to address and clarify various aspects of the CARES Act.
We urge you not to panic or make any decisions that might affect your student loan repayment plan in the long term. The headlines in the news can cause you to lose focus on your long-term goals. It can also make it very difficult to make decisions with confidence in a time of so much uncertainty. We are hopeful that additional clarification of the CARES Act will continue to be provided.
Below are answers to frequently asked questions based on the recent legislation.
It is important to recognize that the CARES Act only applies to student loan debt that is owned by the Federal Government. This includes loans under the William D. Ford Direct Loan Program and some loans under the Federal Family Education Loan (FFEL) Program. Some FFEL Loans are guaranteed by the Federal Government but were originated by private institutions such as Sallie Mae. Loans that are held by colleges and universities such as Perkins loans will not be affected by the CARES Act.
If you need a refresher on what PSLF means, here is our detailed definition of PSLF, displaying a chart with the many income-driven repayment options that are available: Click here.
Federal student loans allow for income-driven repayment (“IDR”) plans that set payments at a percentage of income. IDR is common for borrowers who intend to apply for PSLF. Section 3513 (a) of the CARES Act states “The Secretary shall suspend all payments due for [Federally held student loans]”. This should, by our interpretation, apply to borrowers enrolled in IDR.
Something relating to the current economic environment and IDR that borrowers should be aware of is, if your income has decreased dramatically, you can apply to have your IDR payment recalculated. However, having a reduction in income doesn’t necessarily mean re-calculating your payment amount is the best action to take for your situation.
The 120 "qualifying payments for PSLF is the area causing the most confusion. There is currently conflicting information from seemingly equally credible sources. As of April 1st, FedLoan Servicing’s website suggests that “If you are pursuing Public Service Loan Forgiveness or Income-Driven Repayment (IDR) forgiveness, you may not want to go into an administrative forbearance because the time spent in an administrative forbearance does not count toward the required payments.” This is a clear interpretation that the suspension of payments under the CARES Act will not count toward your 120 qualifying payments.
However, when you read the language of the CARES Act, you are led to believe something completely different. Section 3512 (c) states, “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 or loan rehabilitation program...”
Other reputable outlets such as Forbes go as far as suggesting that servicers’ websites are wrong and not updated yet. “As of March 29, 2020, the U.S. Department of Education and loan servicers have not yet updated their websites to reflect the provisions enacted by the CARES Act.” The author of a series of articles by Forbes, Zack Friedman, is making very bold declarations by telling readers that the suspension of payments will count toward your 120 payments. We caution any readers that a formal interpretation by the U.S. Department of Education and your loan servicer is likely what will be required to have a definitive answer on this topic.
Avoiding big mistakes that may cost you thousands of dollars is critical here. In our opinion, waiting for clarification and 100% certainty on this topic is worth making another month’s payment if your scheduled payment is due before we receive official word.
If you have already refinanced your Federal student loans, you will not be eligible for any provisions under the CARES Act. You should check with your private lender to see what kind of relief, if any, they are offering.
If you have not yet refinanced but are considering refinancing your Federal student loans, you may want to wait. You were probably refinancing to lower your interest rate. The CARES Act Section 3513 (b) reads, “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.” We have seen an updated loan statement showing the updated 0% interest rate. This deal is better than any private lender can offer. Take the 0% interest from the Federal Government for as long as it lasts, and then proceed with refinancing as planned.
On the other hand, if you have federal and private loans, you might want to still consider refinancing your private loans given the historically low interest rates. You can also choose to pause federal payments and allocate that additional cash flow towards their private loans.
We are closely monitoring developments with the CARES Act, from how it affects small businesses (like dental practices), how it affects retirees and their required minimum distributions, as well as, how it’s affecting student loan borrowers’ repayment strategies. There will be confusion anytime a historic Act like this is released that impacts countless economic sectors, especially an Act that is rushed. There may be very important provisions in the CARES Act that could save borrowers thousands of dollars. However, we still need official rulings from the U.S. Department of Education and loan servicers. Stay tuned for more updates, and please don’t hesitate to reach out with questions.
Will Koster is a financial planner with Spaugh Dameron Tenny. The experience of losing his father as a teenager helped Will find his calling in financial planning. He has a passion for working with dentists and physicians, helping them navigate their unique wealth creation journeys. In addition, Will has become the in-house expert on student loans after completing the Certified Student Loan Professional® training.
For over 50 years, Spaugh Dameron Tenny has provided comprehensive financial planning for physicians and dentists across the U.S. In addition to providing personalized advice, we walk our clients through their options to help maximize finances and maintain financial security.
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