A financial crisis leads to fast paced change. When this occurs, the avalanche of new proposals can feel overwhelming. It is important to separate fact from fiction and determine how these changes can influence your personal finances.
On March 13th, the president announced that he was waiving interest on all student loans held by federal government agencies. Over that weekend, I had several friends rejoice about the possibility of having lower loan payments in the short-term. As details were released about the initiative, we realized this was not the case. At that time, the suspension of interest would not cause a reduction in payment. With the March 13th provision, their normal payments would only increase the amount going towards principal.
How did this move the needle for those in need of financial relief during this coronavirus crisis? The answer came in the form of forbearance. Traditionally, student loan forbearance is a process used to help keep your loan in good standing if you experience financial difficulties, substantial medical expenses, a sudden change in employment and other reasons acceptable to your loan servicer. With the suspension of interest, forbearance under the original proposal would not have been financially punitive.
Suddenly it changed …and then it changed again. On March 20th, the Department of Education released more details for the zero interest loans. Federally held student loans will automatically have their interest rates set to 0% for a period of at least 60 days starting March 13, 2020. Then on March 27th, section 3513 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act extended the zero-interest term to September 30th, 2020. In addition to waiving the interest, the CARES Act suspends payments until September 30th as well.
What do I do to opt in for suspending payments? In a word nothing. Where you would have had to move the loan into forbearance before, now borrowers of eligible federal student loans do not need to do anything to have their federal student loan payments suspended under the CARES Act. The payments are paused, and the interest waiver is automatic.
So what should I do? This is a sudden change for your loan servicer, so it is a good idea to monitor your student loan statement to make sure you are not charged late fees by mistake. Also monitor your credit to be sure you are not punished mistakenly for not making payments. If the zero-interest order expires at the end of September, but your finances are not back to normal, check with your loan servicer for an extension or new relief programs.
What if my student loan does not qualify? Federal Perkins loans, Federal Family Education Loans held with private and state lenders along with private student loans are not included in the CARES Act provision, but there still may be help available. Many banks and lenders are offering programs to offset the effects of this crisis for their customers but to get the relief, you will likely have to ask. Private student loan lenders may offer a form of forbearance, but you will need to clarify the details on the interest rates and fees involved. As you would with federal loans, be cautious about interest accrual in forbearance and get the details in writing.
Beyond student loans
We are seeing a multitude of relief proposals from the government (federal, state and local) and private sectors to offset this economic downturn. As you can see in this case, it can take time for the details of the relief to be released and even a longer time for the lenders to prepare to administer them. Continue to stay watchful of the financial proposals that effect you because they can make a substantial difference in your financial wellness.