Savanna Hoffman
The COVID-19 pandemic has caused approximately 30 million people to file for unemployment benefits, making it difficult for many to pay off their student loans. While the CARES Act provided a loan suspension for federal student loans, private loans are not subject to the same regulations. As a result, borrowers with private student loans should speak directly to their lender to understand their options. Forbearance, a temporary pause on payments, is available for all federally-held student loans, and any payments made will be applied directly to the principal. Additionally, borrowers can discuss options with their lender, such as refinancing at a lower interest rate. Those enrolled in an income-driven repayment plan can lower their monthly payment to as low as $0 per month, but it is important to note that loan forgiveness may result in owing income tax on the forgiven amount.
| Characteristics | Values |
|---|---|
| Student loan debt in the US before COVID-19 | $1.7 trillion |
| Number of borrowers in default before COVID-19 | 1/3 |
| US federal legislation to support student loan borrowers | CARES Act |
| Interest rate on federal student loans | 0% |
| Period of interest waiver | Until September 30, 2020 |
| States that have announced agreements with private lenders to pause payments | California, New York |
| Suggested ways to pay off student loans during COVID-19 | Create an emergency fund, pay off high-interest debt, refinance at a lower interest rate, make principal-only payments, recertify income with loan servicer, pay off private loans, continue making federal loan payments |
| Number of Americans with federal student loans | 41 million |
| Amount of student loan forgiveness under consideration by Biden Administration | $10,000 |
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What You'll Learn
Payment pause and interest waiver
Federal student loans held by the US Department of Education are eligible for a payment pause and interest waiver that temporarily sets the interest rate to zero during the Covid-19 pandemic. This means that any payments made on these loans will be applied entirely to the principal amount, accelerating the repayment of the loans. The interest waiver and payment pause effectively put your loans into hibernation, meaning that you will owe the same amount at the end of the pause as you did before the pandemic.
If you decide to make payments on your eligible federal loans during the payment pause and interest waiver, you can get ahead on your loans. Since interest isn't being charged, you will make more progress toward paying off your student loan debt. For example, a borrower who owes $30,000 at a 5% interest rate with a 10-year repayment term will save about $3,333 by continuing to make monthly payments for the duration of the 19-month payment pause and interest waiver. The savings also depend on the interest rate. At 2.75% interest, the savings are $1,530, whereas at 6.8% interest, the savings are $5,193.
If you want to continue making payments on your federal student loans, you’ll need to make the payments manually. AutoPay has been suspended, as have the AutoPay discounts. Contact your loan servicer to ask how you can continue making payments and confirm the address where you should send payments or whether you can make the payments by bank transfer.
It is important to note that borrowers who are pursuing loan forgiveness, such as public service loan forgiveness, teacher loan forgiveness, or forgiveness after 20 or 25 years in an income-driven repayment plan, should not continue making payments. If they do, they will be reducing the amount of forgiveness they will eventually receive.
Additionally, borrowers who are entering an income-driven repayment plan can seek an immediate recalculation of their monthly payment amount if they experience a loss of income. This information will help the servicer determine what discretionary income the borrower has to put toward their loans.
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Pros and cons of refinancing
If you're considering refinancing your student loans during the COVID-19 pandemic, it's important to carefully weigh the pros and cons. Here are some factors to consider:
Pros of Refinancing:
- Low-interest rates: Due to the COVID-19 pandemic, interest rates are currently at near-historic lows. Refinancing now could help you secure a lower interest rate for the life of your loan, potentially resulting in significant savings over time.
- Reduced monthly payments: Refinancing can lower your monthly payments, providing some financial relief, especially if you're struggling to make ends meet during the pandemic.
- Consolidation of multiple loans: If you have multiple student loans, refinancing allows you to consolidate them into a single loan with one monthly payment, simplifying your finances.
Cons of Refinancing:
- Loss of federal benefits: Refinancing federal student loans with a private lender means forfeiting the benefits of federal loans, such as payment suspension during the pandemic, 0% interest rates, income-driven repayment plans, loan forgiveness, and federal forbearance. These benefits can provide valuable financial flexibility and protection.
- Immediate repayment: Refinancing with a private lender may require you to start making payments immediately, whereas federal loans are currently offering a payment holiday due to COVID-19.
- Credit check: While some lenders offer no hard credit pull, refinancing often requires a credit check, which can impact your credit score.
It's essential to carefully consider your personal financial situation, job stability, and overall financial health before making a decision. Evaluate multiple lenders and their terms to make an informed choice that aligns with your short-term and long-term financial goals.
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Student loan forgiveness
The COVID-19 pandemic has caused financial hardship for many Americans, with reduced working hours or job losses. The US government has provided some relief for student loan borrowers, although this has not been without its problems.
During the pandemic, all federally-held student loans were placed into forbearance, meaning a temporary pause on payments. This was a vital lifeline for many, and each month of this period counted as a "qualifying payment" for those in income-driven repayment plans. This action was taken to prevent further financial strain on Americans, but it is important to note that it does not apply to private loans or some federally-backed loans, such as Perkins loans.
The Biden administration sought to cancel some student loan debt, but this was blocked by the Supreme Court. In response, Biden introduced a program that allowed some borrowers to have their loans forgiven after a certain number of years. However, this program has faced criticism for its inefficiency, and the ombudsman office responsible for student loan issues has a growing backlog of complaints.
Despite these issues, the pause on student loan payments provided much-needed relief for borrowers, especially those who were unemployed or underemployed due to the pandemic. With the forbearance period ending, borrowers are now facing a new set of challenges, including the resumption of loan collections and wage garnishments.
Moving Forward
For those struggling with student loan debt, there are a few options to consider:
- Discuss options with your lender: Lenders have created assistance programs to help borrowers during the pandemic, and discussing your situation may lead to a deferment or other arrangements.
- Refinancing: With falling interest rates, it may be possible to refinance your loan at a lower interest rate, which could reduce your monthly payments.
- Counselling services: This is a stressful time, and affordable counselling services can provide emotional support and help you navigate your financial situation.
- Stay calm and be patient: It may take time to find a solution, and customer service wait times may be long.
While the future remains uncertain for many, it is important to remember that you are not alone in facing these challenges, and there are steps you can take to improve your situation.
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Private vs federal loans
During the COVID-19 pandemic, federal student loans were placed into forbearance, meaning a temporary pause on payments. This was not the case for private loans, which are not subject to the same regulations as federal loans. However, some states reached agreements with private loan servicers to provide relief for borrowers facing financial hardship due to COVID-19. These agreements have mostly expired, but private loan borrowers may still be able to negotiate with their lender for reduced payments or refinancing at a lower interest rate.
Federal loans offer benefits that private loans do not, such as income-driven repayment plans and loan forgiveness. For example, the SAVE plan launched by the Biden administration in 2023 aimed to provide an affordable repayment path for borrowers. However, this plan has faced legal challenges and is currently blocked. Additionally, federal loans have fixed interest rates, while private lenders offer variable rates that may be lower than federal rates but can increase over time.
When deciding whether to focus on repaying private or federal loans during COVID-19, it's important to consider the interest rates of each. Federal loans typically have lower interest rates, and with the CARES Act putting the interest rate at 0% until a specified date, borrowers may choose to prioritize paying off private loans with higher interest rates. However, it's also essential to maintain good standing with federal loans to avoid penalties.
To make an informed decision, borrowers should carefully review their loan agreements and contact their loan servicers to discuss their options. It may be beneficial to continue making payments on federal loans if possible, as this can reduce the total amount paid over time. Additionally, seeking financial counseling can help borrowers navigate their options and make informed decisions about their student loan debt during these challenging times.
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Customer service options
If you are struggling to pay off your student loans during the COVID-19 pandemic, there are several customer service options available to you. Firstly, it is important to determine whether you have federal or private loans, as they are subject to different regulations. Federal loans are managed by a federal loan servicer, whereas private loans are managed by a private lender. You can log in to your online account with your loan servicer or check the government website to confirm the type of loan you have.
Once you have identified your loan type, you can explore customer service options. For federal loans, you can reach out to your loan servicer to discuss relief options such as Income-Driven Repayment plans, deferment, or forbearance. During the COVID-19 pandemic, all federally-held student loans were placed in forbearance, temporarily pausing payments. You can also visit StudentAid.gov to access resources and tools, such as the Loan Simulator, to help you understand your repayment options. Additionally, full-time government employees and qualifying nonprofit organization workers with Direct Loan Program loans may be eligible for loan forgiveness under the Public Service Loan Forgiveness program.
For private loans, you will need to contact your private lender directly to discuss your options. Private lenders may offer assistance programs or refinancing options to help borrowers during this time. It is important to note that private loans are not subject to the same regulations as federal loans, including the loan suspension provided by the CARES Act. However, some private lenders may provide benefits or flexibility to borrowers impacted by the pandemic.
When contacting customer service, it is recommended to try multiple avenues of contact. Phone customer service may have long wait times or be affected by call center closures, so it is suggested to first reach out to online customer service or refer to frequently asked questions (FAQs) for students and borrowers provided by the Department of Education. Remember to stay calm and patient when working with customer service representatives, as they are dealing with many similar situations and may have limited solutions. It may take a few weeks to get a new payment plan in place, so don't hesitate to reach out and explore your options.
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Frequently asked questions
Federal student loans held by the U.S. Department of Education are eligible for a payment pause and interest waiver, setting the interest rate to 0% during the COVID-19 pandemic. If you can afford to, it is still worth paying off your loans, as any payments will be applied directly to the principal and cost you less in interest over time.
Private student loans are not subject to the same regulations as federal loans, including the loan suspension provided by the CARES Act. However, some states, such as California and New York, have agreed with certain private lenders to pause private student loan payments. You should discuss your options with your lender and consider refinancing at a lower interest rate.
If you are enrolled in an income-driven repayment plan, such as Income-Based Repayment (IBR) or Revised Pay As You Earn (REPAYE), you can lower your monthly payment to a minimum of $0 per month. After 20 to 25 years of monthly payments, you can receive federal student loan forgiveness, but you will owe income tax on the forgiven amount.
If you have lost your job or are facing reduced hours, you should contact your student loan servicer to recertify your income, which can potentially lower your federal student loan payments. Actions against defaulted student loan borrowers, such as wage garnishment, will be paused or eligible for a refund. It is recommended to build an emergency fund of 5-6 months' worth of expenses to prepare for such situations.
