Relief for Student Debt Because the Government CARES (Act)
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A lot of advisors’ attention over the last few weeks has been
focused on the small business relief aspects of the Coronavirus Aid, Relief, and
Economic Security Act (the “CARES Act”), as the appropriations thereunder are
so significant. However, while recent times have shown the Department of
Education uninterested in providing much assistance for student loan
borrowers, the U.S. Congress has stepped in and provided rare, temporary
relief for borrowers trying to manage during these uncertain times.
Millions of young adults nationwide struggle with managing
student loan debt payments while handling the day-to-day expenses of life
during normal times. Now, many young professionals—especially those in
the medical field who are dealing with decreased pay despite increased hours
working on the frontline battling this pandemic—are trying to deal with the
added financial and emotional strains caused by the pandemic.
The CARES Act provides a bit of relief to remove the stress of
borrowers figuring out how to make the next six (6) monthly installments on
federal student loans. For
most federal student loan borrowers, the CARES Act offers substantial relief
by automatically suspending monthly payments starting March 13, 2020, through
September 30, 2020, and reducing interest to 0% during this time period.
To what federal loans does this relief apply? Direct loans, Perkins loans and Federal Family
Education Loans owned by the U.S. Department of Education. In other words, if
a borrower’s loans are with the federal government, then relief is likely
available. If a borrower’s student loans are “private” with a bank or
institutional lender—not the federal government—unfortunately, he or she will
not get relief under the CARES Act.
What happens to interest under the suspended loans? Interest is reduced to 0% for the forbearance period, and
unpaid interest will not be capitalized during or after the forbearance
period. In other words, the entire federal student loan—principal and
interest—will be paused altogether.
What do borrowers need to do to get relief? Nothing. If a borrower’s payments are under
auto-debit, then the suspension should occur automatically. If a
borrower physically makes payments each month, he or she simply does not need
to cut a check for any installment payment during this period.
What if a borrower has made a payment after March 13, 2020? The borrower is entitled to a refund of the full amount
and should contact his or her loan servicer accordingly if reimbursement is
desired, or elect to apply the payment toward the principal, as explained
below.
What if a borrower wants to keep making payments? Any payments made during this time will be applied 100%
toward principal under the borrower’s student loans, so some borrowers who
can afford to continue to make payments, or even extra payments, can make a
good dent in their outstanding principal balance and help pay off the debt
faster. However, for candidates for Public Service Loan Forgiveness
(“PSLF”), making payments during this period will not be beneficial for
qualification for PSLF, as these payments will not count extra toward the 120
monthly payments for forgiveness.
What is PSLF? Under
PSLF, borrowers with federal loans directly with the U.S. Government can
qualify for loan forgiveness after making 120 monthly payments while working
full-time for an eligible employer, which includes government agencies and
nonprofit organizations. A lot of young professionals in
healthcare/medical professions working for nonprofit organizations (for
example, many hospitals or federally qualified health centers) and
professionals working for the federal government are eligible for
PSLF. Additionally, payments made while on an “income-driven repayment
plan”, which reduces monthly installments to a percentage of income and
extends the term of repayment, count as qualifying payments for PSLF.
Will this forbearance impact eligibility for PSLF? No. The
Department of Education recently released updated FAQs stating that each suspended payment will count
as a qualifying payment for PSLF so long as the payment would
otherwise have met PSLF’s requirements. Accordingly, if the borrower
continues working full-time for an eligible employer during the forbearance
period, then each suspended payment will count toward the 120 payments for
forgiveness.
What if a candidate for PSLF is laid off or furloughed, or his
or her working hours are reduced?
Borrowers who experience a layoff, furlough or reduction in hours to fewer
than 30 per week will be impacted differently due to the change in employment
status with the eligible employer. Suspended payments—or electing to
continue to make monthly payments—during this time would not count
toward the 120 payments for forgiveness under PSLF. If a borrower is in
this category, he or she will not lose eligibility for PSLF, as the 120
payments for forgiveness do not need to be consecutive. However, once
the borrower returns to full-time employment with an eligible employer,
payments at that time will start counting again toward the 120 payments for
forgiveness under PSLF.
So…what should borrowers do? Each
borrower’s situation is different. With that said,
For many professionals, student loan debt can make up a
significant portion of their financial horizons, so making the proper
decisions now can have an impact on estate planning options in both the near
and long-term futures. Please feel free to reach out to any of our
Private Client Service Group members with any questions.
Our firm is constantly providing updated legal guidance on COVID-19 issues on our website; please visit the COVID-19 Legal Resource Center. Please do not hesitate to reach out to any of our firm’s lawyers to discuss how we can assist your practice during this crisis. |