September is traditionally a time for back to school and, even in a time of COVID-19 restrictions, September was to be the month when student loan payments got back on track.
Well, like a lot of things, we’re looking at yet another new game plan here. And it’s one that savvy consumers might be able to use to their advantage.
Borrowers across the country began receiving notices in April from their federal student loan servicers about temporary 0% rates and a pause in payments. No payments were due, which theoretically offered some relief to tight budgets as wages were cut and jobs were lost during the fight against the coronavirus pandemic.
But that deal was set to end Sept. 30 and borrowers would have to resume making payments on these federal student loans soon.
As the health crisis continues to loom, though, borrowers are now looking at receiving an automatic three-month extension as the federal student loan forbearance program is set to run until Dec. 31.
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Loan servicers are expected to notify borrowers of the extension through the fall. And, according to the U.S. Department of Education department, borrowers can expect to see this extension reflected in their accounts over the next several weeks.
Who continued to pay student debt in 2020?
The first round of relief came into play when a majority of student loan borrowers received more breathing room under the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, signed by President Donald Trump on March 27.
The new extension until Dec. 31 came into play after the White House issued an order on Aug. 8 and the Department of Education followed up on Aug. 21 to implement the memorandum.
Not everyone is covered. About 9 million borrowers — those with private student loans, Perkins loans and Federal Family Education Loans not owned by the federal government — were left out of the picture, according to the Student Borrower Protection Center, a nonprofit advocacy group.
Some efforts continue to try to get more student loan borrowers covered. A coalition of attorneys general, including Michigan Attorney General Dana Nessel, has urged the U.S. Senate to provide relief for all federal student loan borrowers, including borrowers whose federal student loans are owned by private entities.
While the federal government supports or guarantees these loans against default, Nessel’s office noted that “these borrowers are struggling with the pandemic just as other federal student loan borrowers are, but do not have relief options under the CARES Act solely because of the entity that owns their loan.”
What should you do with extra cash in 2020?
If you do qualify for relief now, take a look at your budget and financial situation to craft a plan that can help you down the road.
Someone who continues to bring home a paycheck, for example, might redirect the money that would have been used toward student loan payments.
If you have high cost credit card debt, for example, you could use that money toward paying off old credit card bills through the rest of the year.
If you’d like to continue making student loan payments to pay that debt off quicker, you can continue to pay down student loan debt this year.
“All borrowers with federally held student loans will have their payments automatically suspended until 2021 without penalty,” according to the Education Department.
“Borrowers will continue to have the option to make payments if they so choose. Doing so will allow borrowers to pay off their loans more quickly and at a lower cost.”
Or if you have very limited emergency savings, rebuild what cash you have on the sidelines for emergencies, like the day you might need new tires or might have trouble paying the mortgage.
“Save at least half a year’s salary in an emergency fund,” said Mark Kantrowitz, publisher and vice president of research for Savingforcollege.com.
“You might have a job now, but who knows what will happen in a month or two, especially if there’s a second wave of the pandemic.”
Kantrowitz noted that the average duration of unemployment during the 2008 economic downturn was five months. Depending on your skills and experience, it could take as long or longer to find another job in the latest recession.
Take time now to prepare to be able to make your payments in 2021. Be aware of how much you’ll owe each month beginning in January and set some money aside for that bill.
If your federal student loan payments were set to be automatically deducted from a bank account before, Kantrowitz said, you may need to sign up again before the student loan payments will be due next year. “This will probably be required because the lender doesn’t know if you still have the same bank account,” Kantrowitz said.
Will suspended payments count as qualifying payments in forgiveness programs?
Fortunately, the answer is yes, according to Will Sealy, cofounder and CEO of Summer, a New York-based startup that offers software to help borrowers keep track of their student loans.
The Department of Education has confirmed that the three month extension from Oct. 1 to Dec. 31 will count toward programs like income-driven repayment and Public Service Loan Forgiveness. But Sealy cautioned that the borrower must already meet the other program requirements for this to work.
What if I face financial hardships in 2021?
If you’re facing financial problems next year, it’s a good idea to contact the loan servicer to ask about options for financial relief.
Payment options exist for federal loans, including the Federal Family Education Loans that were not eligible for the payment pause and interest waiver. You might be able to pause payments by tapping into the economic hardship deferment, unemployment deferment, and forbearances. But such breaks won’t be automatic.
“If you were already in an income-driven repayment plan and your income has changed,” Kantrowitz said, “you can ask the loan servicer to recertify your income now instead of waiting until the annual recertification date.”
If you’re having trouble making payments on private student loans, you can contact the lender. Many private student loan lenders are offering a 90-day COVID-19 forbearance upon request.
If a borrower still has trouble paying the bills, Kantrowitz said, contact the lender or loan servicer to ask about options. Many are extending the COVID-19 forbearance on a case-by-case basis until the borrower’s financial situation improves.
As part of the extension, struggling borrowers need to realize that debt collection on defaulted, federally held loans will continue to be halted too. If a borrower’s employer continues to garnish wages for such loans, the borrower will receive a refund of those garnishments.
While there may be more resistance to expanding the relief, experts say the Dec. 31 extension is likely.
Some haggling might be ahead with some questioning the legal authority of the Department of Education to simply extend the interest waiver, Kantrowitz said, but student loan borrowers still are likely to benefit.
“Nobody is going to oppose it, because such an extension has bipartisan support,” Kantrowitz said.
“It seems likely that it will be codified into law when the next stimulus is passed by Congress.”
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