Finance

A Quick Guide to how COVID-19 is Affecting Student Loans

When I first heard about the Coronavirus sweeping through China in December, I felt for all of the people affected by it and worried about it reaching the U.S. for a moment, but that was it. Then, like most of us, I packaged it up and put it in the “foreign affairs to keep an eye on” section of my brain, and shifted my focus back to Christmas shopping, holiday parties, and the week off I planned to spend snowboarding in the White Mountains.

It’s hard to accept that it’s only been four months since then, but the world has changed entirely and will never be the same. Like we learned about World War II and the Great Depression, someday future generations will learn about the COVID-19 Pandemic of 2020 in the classroom; a time that put the entire world on lockdown and drove a spike through the economy.

While the health of our community is and should be the top priority, the economic downfall of COVID-19 is undeniably a concern that’s weighing on everyone. While I’m fortunate enough to work at a tech company in a job I can do remotely, that’s not the case for the 10 million Americans who have been laid off or let go and have filed for unemployment. This number is expected to rise as the country tightens restrictions on the stay at home advisory and companies look to cut expenses.

Putting aside the longterm affects of this pandemic, a short-term solution provided by the government includes a 2.2 Trillion Stimulus bill to help particularly those who are out of work and businesses that have faced hardship thanks to COVID-19. To be eligible for this stipend as an individual, you need to fall within a certain income bracket, which you can learn more about here.

But the question I’m here to answer is what does this mean for those of us who own a piece of the 1.5 Trillion in U.S. student loan debt?

Glad you asked.

Student Loan Payments will Automatically Stop…..

That’s right; from March 13th, 2020 – September 30th, 2020, federal student loan payments will automatically be put into forbearance, meaning your account basically freezes the way it is and there are no penalties or hits to your credit score for not making payments. Thanks to the CARES Act, which was created in hopes of alleviating some of the financial burden COVID-19 has put on U.S. Citizens.

….. But not for Private Lenders.

Quite the catch, huh? If you’re like me and part of the 20% of indebted Americans who re-financed your student loans through a private bank for a lower interest rate, this unfortunately doesn’t apply to you.

Most Importantly, INTEREST is on Pause….

So your payments are on pause and that’s great, but the best part about the CARES Act is that interest too is on hold. This means there is no accruement of interest on your loan principal, AND if you can make payments you will be paying 100% towards the principal of the loan.

…But Also Not for Private Lenders.

Not surprising, right? Unless otherwise indicated by your private lender, these payment forbearance and 0% interest benefits will not apply to you.

Bottom line

If your loans are eligible for the CARES Act and you have the financial bandwidth to do so, continue your payments and pay as much as you can! Interest free loans means that 100% of the money your putting towards them is chipping away at principal- meaning you’ll pay less in the long run and pay them down faster.

If your loans are not eligible because they’re private, most lenders are offering very lenient payment plans to support their customers during the COVID-19 crisis. If you’re bummed about not being eligible for the CARES Act, keep in mind that this benefit has an expiration date, and if you refinanced you’re likely receiving a lower interest rate in the long run.

Who is eligible? Quick Terminology & Overview

Defaulted vs. Non-defaulted: Defaulted basically means you’re not up to date on your loan payments; you have not paid them in the agreed upon manner set by your lender. Non-defaulted is just the opposite; you’ve made your payments on time and consistently. You can learn more here. Both types are eligible for the CARES Act.

Direct Loans are low-interest loans funded by the U.S. government. Most college students who are approved for loans by the Department of Education will receive Federal Direct Loans, and unless you’ve refinanced, it’s likely the type of loan you have. Direct loans are serviced through lenders like Navient and My Great Lakes, and if you’re not sure if your loan is direct, a list of additional servicers can be found here.

FFEL Program Loans: Standing for Federal Family Education Loan, this loan program ended in 2010, but unfortunately the student debt did not go with it. This program allowed private lenders to offer federal student loans to students, and unless otherwise indicated or you’ve refinanced, these loans are eligible for the CARES Act.

Federal Perkins Loans are need-based federal loans offered by the government and falling under the Direct Loan Program. These are those magic loans we all hoped we had that are eligible for cancellation if you work in a specific public field and qualify. Federally owned Perkins loans are eligible for the CARES Act unless otherwise indicated.

*IF your Perkins of FFEL loan is not owned by the education Department, the CARES Act allows you to roll it into a Direct Consolidation loan, where you will receive the paused payments and 0% interest benefits through September. Keep in mind though that once things return to normal, your interest rate may be higher than before – so this may not be the best idea.

Private Loans are offered by private banks, credit unions, and organizations. If you’ve refinanced in the past few years for a lower interest rate, you likely now have a private loan. These include venders like Citizens Bank, Sallie Mae, Discover, and more. Private loans are not eligible for the CARES Act.

For more information, check out the Student Aid website.

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