Stimulus negotiations have fallen apart for now and a deal appears to be weeks away, at best. That has left many with questions, particularly student loan borrowers.
The CARES Act was passed in March and suspended payments and interest on federally-held student loans through September 30, 2020. Without a deal to extend that provision, student borrowers were set to resume payments soon. Luckily, they caught a break when President Trump signed an order than suspended payments through the end of the year.
But there are a few things borrowers should know.
Borrowers not struggling.
Borrowers who aren’t struggling financially benefit from Trump’s extension. If they take advantage of the suspension, they have extra cash to spend. And that might help the economy. Spending the money they would otherwise pay towards their student loans might provide a marginal stimulus for the economy through increased or sustained consumer spending.
Some might also consider saving that money, but that might not be the best financial decision. Like the CARES Act, Trump’s order suspended the interest on those federally-held student loans. Borrowers who make payments during this time will be making principal-only payments and will pay down the balance of their loan faster, which will save them money in the long run.
Borrowers in income-driven repayment.
Borrowers in income-driven repayment benefit for Trump’s order too. If they aren’t struggling, they can make principal-only payments that pay down their loans faster. And if they take advantage of the $0 payments, it also counts towards the loan forgiveness offered under the program.
Borrowers in these repayment plans should also make sure their income information is up to date. For those who might have experienced income reductions, they want their payments to also be reduced when payments resume on January 1, 2021.
And since it’s been several months since payments were suspended, they might be required to recertify their income to stay in these plans. If borrowers forget to do that, their payments might default to the standard repayment plan, which would likely mean higher payments when payments resume.
Borrowers seeking Public Service Loan Forgiveness.
Borrowers seeking forgiveness under the Public Service Loan Forgiveness Program (PSLF) program should note that Trump’s order was a little different than the CARES Act suspension. The CARES Act included language that said, as long as student borrowers would otherwise qualify for the PSLF program during the suspension, the months of non-payment would could towards the required number of payments to receive forgiveness.
But the President’s order did not include any language about the PSLF program. Unless Congress passes legislation that extends the CARES Act provision on student loans, student borrowers who don’t make payments during Trump’s three month suspension won’t receive credit toward the required 120 payments for loan forgiveness under the PSLF program. The Department of Education might figure out a way for the months of non-payment to count, but it will be hard to do so without legislation.
Of course, PSLF borrowers can take also advantage of the relief and save money during this time, especially if they have experienced a reduction in income due to the economic downturn. But for those PSLF borrowers who aren’t struggling, they should consider making payments.
While they could save money now, it might pay off in the long run to pay them. Because PSLF borrowers are in income-driven repayment plans, their payments increase as their income rises. And, on average, college graduates see their income rise over time, so the three payments today might be less than three payments years later, especially for borrowers early in their careers.
All student borrowers.
All borrowers should keep an eye on what Congress does. There have been several proposals that call for extending the CARES Act suspension, some through the end of the year and others for another year. Other proposals call for student loan forgiveness, but that seems unlikely.