The CARES Act: Student Loan Considerations

Note: Our email from late last week focused on the most general aspects of the CARES Act. Earlier this week, we sent out a letter focusing on small business owners, self-employed workers, and independent contractors (1099s). We will also be sending out information for Medicare recipients and folks who, by age or inheritance, are subject to RMDs (Required Minimum Distributions).

Today’s letter focuses on relief available to students and co-signers of federal student loans, whether still enrolled in school or in the payback period. As before, we invite you to share this information with anyone you know who may be affected and benefit from the provisions outlined below.

We’re glad to return with yet more information from the CARES Act, this time specifically pertaining to federal student loans. It’s important to note up front that the CARES Act does not apply to privately held student loans, so unfortunately, any private loans will continue as they have unless the company offers deferral or forbearance independently.

Provisions Regarding Loans in Repayment

The most crucial aspect of the legislation for people who are currently paying back their loans is that required payments on federal student loans have been suspended through the end of September. The affected loan types are Federal Direct Stafford Loans, Federal Direct Parent PLUS Loans, Federal Direct Grad PLUS Loans, and Federal Direct Consolidation Loans. Federal Perkins Loans will be eligible if held by the federal government, but not if held by colleges.

Previously, the White House had ordered the Department of Education to allow a 60-day break from repayment without interest or penalties. When payments resume, they will continue to be the regular amount – the unpaid principal will not accrue, just add on to the end of your loan. If you have auto-pay turned on, you do not need to make any changes – payments will suspend automatically and resume automatically in October, though we recommend setting a reminder to check before your payments are scheduled to resume.
For folks in a good financial position, this provides an opportunity to pay 100% towards principal. If you elect to do so and have room in your budget, it may be beneficial to continue the same payments you have been doing on order to pay your loan down quicker.

Loan Forgiveness Considerations

For people who intend to apply for Public Service Loan Forgiveness or another federal loan forgiveness program, the legislation specifically states that each month where payment was suspended will count towards your loan forgiveness, even if you don’t make a payment! Since the rules surrounding loan forgiveness can be tricky, here is the exact text from the bill, Section 3513(c):

“[T]he 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 authorized under part D or B of title IV of the Higher Education Act of 1965 for which the borrower would have otherwise qualified.”

As a result, we would recommend that if you intend to apply for one of those covered loan forgiveness programs, stop your student loan payments during this period even if you can afford to keep them going, otherwise you’ll be paying down a loan that will disappear in the future.

TEACH Grants and Teacher Loan Forgiveness are also specifically mentioned in Section 3519(b), and the legislation requires that interrupted teaching time be treated as a full year if due to your school closing. Generally, the Teacher Loan Forgiveness program requires that you complete consecutive years of service, but this is being waived as long as you resume teaching once the coronavirus emergency is over.

Employer Payments Towards Student Loans

One opportunity that’s worth discussion with your employer is a new provision that allows for them to provide $5,250 in student loan repayment benefits without it being considered income to the employee. This must be completed by the end of 2020. This is an adaptation of an existing program that allows your employer to pay $5,250 a year for current tuition without it being taxable.

If you and your employer are in a good financial position, and your employer is flexible enough to allow it, we recommend hanging onto this information and starting the conversation in a month or two when things have hopefully leveled out. Being able to lower your salary by $5,250 and receive those benefits towards your student loans instead might be a great option from a tax perspective as well as helping eliminate debt.

Provisions for Current Students

Students who are still in school also get some relief from the CARES Act as well. Many colleges and universities have closed mid-term due to the coronavirus, and in addition to displacing students it has created confusion and concern for students regarding their loan obligations.

Typically, a portion of federally-issued loans or grants must be paid back if a student withdraws mid-term. This has been canceled for both institutions and students as long as under a “qualifying emergency,” which is defined as a result of coronavirus due to a presidential declaration of national emergency, or a national declaration of public health emergency. Pell Grants are specifically named in this section.

In addition, under the same qualifying emergency trigger, any loan that had been issued for a current term interrupted due to coronavirus will be entirely canceled. This applies whether the school cancels the term or the student withdraws.

If a student received payments contingent on work-study, institutions are allowed to turn unused funds into grants and keep paying out work-study money while schools are closed.
Lastly, both subsidized federal loans and Pell Grants have lifetime limits on the number of terms for which a student may receive funding, and the CARES Act excludes any incomplete semester due to the coronavirus from this tally.

This is quite a lot of information, and we are happy to help you navigate it. With highly specific questions related to students still in school, we may recommend that you consult your institution’s financial aid department. While they should be up to speed on these changes, you may need to locate specific sections of the bill to show them. Fortunately, most of the bill is written in relatively plain language, and the education sections of the bill are under Part IV, Subtitle B, which covers sections 3501-3591.

We look forward to sharing our final newsletter related to the CARES Act soon, which will cover benefits related to Medicare and Required Minimum Distributions.

As always, please feel free to reach out with any questions.