Update: On March, 27th, Congress passed and the President signed into law the “CARES Act,” emergency legislation providing. More recent information regarding COVID-19 relief for student loan borrowers can be found at: https://www.studentloanborrowerassistance.org/what-the-cares-act-means-for-repayment-of-federal-student-loans/
This past week has been a dizzying array of announcement after announcement related to COVID-19. The world of federal student loans has not been spared from this frantic information overload. Understandably, borrowers are confused about what they should be doing and unfortunately, there are few answers right now. We’ve tried to distill the information for borrowers (as of Wednesday, March 25) in one place.
Administration Announcements and What they Mean
In the past two weeks, the U.S. Department of Education has made two separate announcements about relief that it plans to provide to borrowers. In short, it plans to waive interest for a short period of time and allow borrowers to pause payments. Importantly, both of these protections only apply to loans held by the Department of Education (Direct loan, ED-held FFEL loans, and ED-held Perkins loans). It will not apply for commercially-held FFEL loans or school-held Perkins loans. Borrowers with those types of loans may be able to consolidate their loans into the Direct loan program to take advantage of these protections. (To find out what kinds of loans you have, see here.)
According to the Department, all borrowers with federally-held student loans will automatically have their interest rates set to 0% for a period of at least 60 days. The Department has stated that student loan payment amounts will not change with the interest reset. Any payments made during this period will go toward paying down principal and any previously accrued interest. The Department has not released details about how it will instruct its servicers to implement this interest provision.
The Department’s plan also allows borrowers with federally held student loans the option to suspend their payments using an administrative forbearance during the crisis. This pause may be used for a period of 60 days, beginning on March 13, 2020, and the Department may extend that period. Because of the interest waiver, borrowers’ balances will not grow while in this forbearance. The current administrative announcements state that months in which borrowers use this emergency forbearance to suspend payments will NOT count toward borrowers’ monthly payments for purposes of Public Service Loan Forgiveness (PSLF) or income-driven repayment (IDR) plan forgiveness. Critically, it has not stated whether utilizing this forbearance will cause outstanding interest to be capitalized (adding unpaid interest to the principal balance), causing the loan balance to balloon. This could be an issue for borrowers in an IDR plan who may have substantial unpaid interest.
To request this forbearance, borrowers should contact their loan servicer online or by phone. Unfortunately, borrowers may experience long wait times or significant difficulty reaching their servicer by phone during the crisis.
The Secretary has also authorized an automatic suspension of payments for any borrower more than 31 days delinquent as of March 13, 2020, or who becomes more than 31 days delinquent. The Department’s current guidance states that therefore, borrowers who are already more than 31 days delinquent or who become so during the crisis will be automatically placed in forbearance without their needing to contact their servicer or risk going into default during the emergency. However, borrowers should anticipate the forbearance ending in 60 days (or longer if the Secretary extends the time), and they will need to resume repayment or request other relief, such as additional forbearance, at that time to avoid the risk of defaulting.
What about borrowers in default?
On Wednesday, March 25th, the Department announced it has halted involuntary collections–including the seizure of tax refunds and wage garnishment during the crisis. According to the announcement, the Department plans to make the policy retroactive to March 13, the day President Donald Trump declared a national emergency. It stated that it will return any amounts withheld after that date. It is unclear whether this applies to all federal student loans or only Department held loans. We will update if the Department provides clarity.
Proposals In Congress
Congress is currently working on legislation to respond to the public health and economic impacts of the coronavirus pandemic, and the legislation is likely to include some provisions on federal student loans. At this time, it is still unclear what will be in the final legislation, but both Republicans and Democrats have included provisions providing for suspension of payments and allowing time in suspended payments to count towards PSLF and IDR forgiveness (this is in contrast to the current administrative plan). Otherwise, Democrats and Republicans have put forward very different plans. We expect something to pass within a week, so there should be more clarity at that time. Borrowers who do not face the risk of going into default or other negative repercussions this week may want to wait a week to take action on their student loans so they can get more clarity about how loans will be treated during the crisis.
NCLC has advocated for robust protections for all borrowers during the crisis, and for cancellation of at least $10,000 in federal student loan debt for all borrowers to ensure financial relief and economic recovery for those already burdened by debt.
What to do if you need help with your student loans
Given the uncertainty as to what relief Congress may provide to student loan borrowers in coronavirus relief bills in progress, borrowers who can afford to wait a week for legislation to likely be finalized may wish to do so. At that point, there should be more clarity about borrowers’ options.
However, borrowers facing imminent deadlines this week can request a forbearance to buy themselves some time. Borrowers currently in default and facing tax refund offsets, wage garnishment, or other involuntary collections should see NCLC’s resources on seeking relief from such actions here.