The Senate is about to pass a $2 trillion stimulus plan, which has buy-in from Democrats and President Trump. While the main purpose of the stimulus is to keep the economy running, the bill also provides enormous relief to borrowers with federal student loans.
This national student loan forbearance will happen over the coming days automatically. Most borrowers will not need to respond or make changes from what they are currently doing.
Continue making your normal payments and acting like nothing has changed. In the coming days once the bill gets finalized, you’ll probably notice your bank account didn’t get debited.
Here’s the most important provisions of the coronavirus student loan relief bill:
- Suspension of all payments for six months through September 30, 2020
- Takes effect automatically without any effort on the part of a borrower (likely implemented over the coming days)
- The six months of suspended payments count towards loan forgiveness programs, including Public Service Loan Forgiveness (PSLF) and Income Driven Forgiveness (PAYE, REPAYE, IBR)
- No interest will accrue for six months until September 30, 2020, extending the Trump student loan interest freeze, which started March 13, 2020
- Employers who contribute to their employees’ student loans receive a tax break, although that measure must be renewed in 2021 to be permanent
- Borrowers in default will have their six months of suspended payments count towards the nine months needed for loan rehabilitation.
- No collection, wage garnishment, or seizure of tax refunds will happen (backdated to March 13, 2020)
Unfortunately, this bill does absolutely nothing for borrowers with private student loans, FFEL loans held by private institutions, or Department of Health student loans.
Here’s what is does for your bottom line as a student loan borrower and what you need to do to get the benefit.
Editors’s Note: This stimulus bill is mostly finalized but Congress could still make some changes. Come back to this article to see the latest updates.
The Stimulus Plan is Amazing if You Have Federal Student Loans
Some versions of the Coronavirus rescue plan included anywhere from $10,000 to $30,000 in student loan cancellation in addition to Congress making payments for everyone.
While that did not come to pass, this bill is still extraordinarily generous for borrowers with federal student loans.
There were already protections in place to reduce your Income Based payment if you lost your job.
However, millions of people were about to lose their jobs at the same time, and this is clearly not what loan servicers are built for.
Borrowers Needed Federal Help Because Many Don’t Know How to Recalculate Their Payment
Servicers like FedLoan Servicing shut down many of their operations during the Coronavirus pandemic.
So even if borrowers knew they could recalculate their income based payment to a number as low as $0 a month if they lost their job, they couldn’t get someone on the phone to do that in many cases.
Also, our survey of 4,100 readers on March 18, 2020 suggested that at least 43% of borrowers do not even understand how to pause their federal student loan payments if their income falls. See the table below.
Source: Survey of Studentloanplanner.com readers, 03/18/20
Our readers tend to be graduate degree holding professionals who are more informed than average on student loan rules.
Hence, the true number of borrowers who know how to recalculate their payment is likely much lower.
When I saw this data, I knew we needed broader action than the Trump student loan interest freeze with a 60 day forbearance.
This stimulus bill took dramatic action and allows borrowers to count all suspended payments for the next six months towards any forgiveness problem they would have been eligible for.
So borrowers continue to accrue credit towards PSLF, IDR, and other forgiveness programs. In the case of PSLF, you would need to maintain a full time job at a not for profit or government employer but these $0 a month payments would count.
Remember there are no employment conditions for 20 year PAYE and 25 year REPAYE forgiveness. So suspended payments count for that type of forgiveness too.
In other words, if you’re a borrower with Federal Direct Student Loans, there is no reason not to get excited about this national student loan forbearance.
At Least 6 Million Federal Student Loan Borrowers Got Left Behind
Only loans held by the Department of Education appear to qualify for this interest and payment freeze thanks to the stimulus plan language.
That means that loans made under the Federal Family Education Loan program (FFELP) do not qualify if they are held by a commercial lender.
The government stopped issuing FFELP loans in 2010, so anyone who graduated or went to school before that time likely has this kind of student loan.
Here’s the current breakdown of FFEL student loans by who owns them, according to the Department of Education.
Source: Studentloanplanner.com calculations using Dept of Ed data
Hence, a minimum of 6 million student loan borrowers with federal loans “owned by a commercial lender” will not receive any help with their student loans at all, despite having used a federal borrowing program.
Borrowers with Department of Health Student Loans Do Not Get Relief Either
The Department of Health actually has a large student loan program. Dentists, physicians, and nurses often take out Health Professions Student Loans (HPSL) or Loans for Disadvantaged Students (LDS).
These loans carry a 5% interest rate and usually show up under the loan servicer Heartland ECSI if you have them.
You can actually consolidate these loans into a Direct Consolidation Loan to receive forgiveness.
However, most borrowers assume Health Professions student loans are private and thus are ineligible for forgiveness programs.
This is an extremely common five figure mistake our clients make when managing their own student loans.
Of course, Congress appears to have left out Department of Health student loans from any relief, affecting many thousands of healthcare practitioners.
If you have this kind of loan, you would generally need to consolidate it to receive a subsidy.
How to Get the Student Loan Interest and Payments Freeze on Loans the Don’t Qualify
Borrowers with older and less common types of federal student loans can consolidate them into a Direct Consolidation loan to receive the payment and interest freeze.
However, these loans could lose all credit towards Income Based Repayment forgiveness.
When you consolidate a student loan, you lose all credit towards the date that loan gets forgiven.
That’s very important. Don’t just consolidate every FFEL loan without knowing if you’re hurting your chances of forgiveness first.
If that concern does not apply to you, then consolidate your non Direct loans by logging into https://studentaid.gov/app/launchConsolidation.action. Click on the “consolidate my loans” section.
Help for Borrowers in Default
Millions of student loan borrowers are in default on their student loans.
One way to exit default is to make nine months of consecutive payments
Unfortunately, borrowers often miss a payment and cannot get their loans rehabilitated, leading to wage garnishment and seizure of tax refunds.
Importantly, if you’re trying to rehabilitate your federal student loans, with the stimulus plan you can now count the 6 months of suspended payments towards the 9 months needed to exit default.
That’s big news as you only have to work with your collections agency to make 3 payments now instead of 9. Plus, these payments can be as low as $5 a month.
When you rehabilitate your student loan, you remove this negative event from your credit score and get enrolled in an income driven plan so that the loans are affordable for the future.
The other way to manage default is to consolidate your student loans.
However, that does not remove the default from your credit score.
Tax Refund Seizure, Collections, and Wage Garnishment is On Hold
In addition to helping borrowers get out of default for the future, this coronavirus stimulus bill pauses collections efforts on federal student loans.
It also stops collections, wage garnishment, and seizure of tax refunds retroactive to March 13, 2020.
That’s also big news for borrowers struggling the most.
Employers Can Now Deduct Student Loan Payments Made for Employees’ Student Debt
According to Yahoo Finance, the student loan stimulus plan gives employers a tax deduction for paying employees’ student loans. The measure is temporary and must be renewed January 2021.
Corporate lobbyists have worked to pass tax-free employer student loan assistance for years.
It will help some of our readers, but I don’t trust a policy that company lobbyists want that badly.
I’ve gone on the record that employer student loan assistance does not help as much as you think and can actually hurt you in some cases.
It’s the same thing as giving a tax break for employer provided health insurance. It makes the work force less mobile and more tied to their job, which is in the interest of the employer more than the employee.
Importantly, student loan contributions replace money that might have gone towards higher wages, which continue after you have $0 student loans.
Even some non-profit hospitals require that payments they make for student loans be applied directly to loans held by the loan servicer, which is stupid in the case of a borrower working towards PSLF.
We’ll see if that provision stays in the final bill.
The Coronavirus Stimulus is Extremely Unfair for Borrowers With Private Student Loans
Full disclosure: this website receives a large portion of its revenue from readers who decide to refinance their student loans to a lower interest rate.
Federal student loan borrowers receive an interest freeze. Private student loan borrowers receive a slap in the face.
By setting federal student loan interest rates at 0, you effectively kill any student loan refinancing for the next six months (except for refinancing loans that are already private).
Our company has cash reserves, and people will refinance again in the future when federal student loan interest is no longer at 0%. Plus, borrowers needed student loan relief during this crisis, and I’m glad some of our readers are getting that help.
I’m incensed though that huge numbers of borrowers who refinanced their student loans with private lenders will get absolutely no help from Congress.
They seem to be bailing out everyone else.
What message do you send to borrowers who wanted to responsibly pay down their student debt when you rescue all federal student loan borrowers but leave private student loan borrowers out of any relief package?
A critic might ask what Congress could have done?
It’s simple: reimburse private companies for the interest just as they did for a host of other industries.
Unfortunately borrowers with private or refinanced student loans will join many with FFEL and Dept of Health loans in receiving no help.
Make this Short Term Student Loan Relief Lead to a Long Term Plan
Suspending payments for six months is a great step for federal student loan borrowers, as is suspending all interest.
Obviously, we wish more borrowers had been included in the relief package.
The bill still needs to go to the House and get signed by the President. However, all the players negotiated together to make sure this stimulus plan would pass.
Hence, any changes will likely be moderate.
Even if you don’t have to make payments, student loans will still be there after the six month payment and interest freeze is over.
If you need a plan on how to get to $0 of student loans forever, that’s what we specialize in.
What do you think of the student loan coronavirus stimulus bill? Sound off in the comments.
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