Sean Pyles: Welcome to the NerdWallet's Smart Money podcast, where we answer your money questions in 15 minutes or less. I'm your host Sean Pyles.
Liz Weston: And I'm your other host, Liz Weston. As always, be sure to send us your money questions. Call or text us at 901-730-6373. That's 901-730-NERD. Or email us at [email protected]
Sean: In the past few episodes, we've been addressing various aspects of how the coronavirus is changing the way we manage our finances. We swear that we'll get back to non-coronavirus questions soon, but we had one come in last week that we couldn't pass up. The question is from Heather in Maryland who asks, "Can you explain the provisions in the federal legislation as they relate to student loans? Do borrowers have to take action to receive these benefits or are they automatic?"
Liz: Heather's talking about the $2 trillion economic stimulus package that Congress passed in late March. That was in response to the coronavirus pandemic. It was called the CARES Act and it included the $1,200 checks for most Americans as well as a ton of other help.
Sean: Yeah, this is the single largest rescue package in American history. We're living in historic times and this act is a reflection of that. But to Heather's question, there are a lot of different parts to this bill and navigating it can be really confusing.
Liz: To talk us through how people with student loans can take advantage of this legislation, we're talking with student loan Nerd, Ryan Lane. Let's get to it.
Sean: Hey Ryan, thanks for coming on the show. I hope you have your wonk hat on today because we have a question about the ins and outs of a $2 trillion piece of legislation for you. Specifically our listener, Heather, is wondering how she can access the student loan relief aspects of the CARES Act. So to start, can you talk us through what exactly is in this package for people with student loans?
Ryan Lane: Sure, and thank you for having me on. So I'm actually going to start by saying what's not in the package because really I think that's the big takeaway from this for our student loan borrowers. And I know you usually do takeaways at the end of the episode, so my apology for stepping on your toes, but I think it's really important for context.
So in the lead up to the CARES Act passing, there was a lot of talk about a borrower bailout or canceling $10,000 of debt for student loan borrowers. So those proposals did not make the final bill. Borrowers are not getting student loan forgiveness, but what they are getting is flexibility. Now, the way the government is doing that is by pausing most federal student loan borrowers payments until Sept. 30. And during that break, no interest will accrue on those loans. So if you can't afford your student loan payments right now or you would maybe prefer to put that money toward a more pressing financial matter like your rent or some higher interest debt or whatever it might be, you now have that ability to do so.
The other big relief measure for borrowers is that all collection tactics for defaulted student loans have been stopped until further notice. Now, that includes like the annoying stuff like the collection calls and letters, but also things that should make a real financial difference for borrowers like no longer garnishing their wages or taking their tax refunds. And because we've heard this question from a few borrowers now as well, it's worth noting that those stimulus checks that you mentioned, those aren't eligible for that kind of seizure either if you have defaulted student loans.
Liz: OK, that's great news. Let's turn to the second part of Heather's question. Are the benefits automatic or does she need to do something to trigger them?
Ryan: Yeah, that's a great question. So these benefits are going to be automatic. You don't need to contact your student loan servicer to pause payments or get that 0% interest rate. Your account should reflect those changes eventually, and that's the kind of thing that I want to get across to borrowers as well. Automatic does not mean instantaneous because we've already heard from some borrowers who are worried that their interest rate doesn't say 0% right now for example, and I totally get that concern because servicers don't necessarily have the best reputation with borrowers.
Ryan: I know, but I think this is more so a case of just servicers playing catch-up due to the evolving nature of these new benefits. And so just for a little bit of background on that, the president announced the interest rate waiver on March 13. The Department of Education then issued initial guidance about a week later that said the benefit would last 60 days and that borrowers would have to request it. Then the CARES Act came out and that pushed the benefit to six months and made it automatic.
You have to remember that services are like any other business or organization and they've been impacted by the coronavirus from a staffing perspective as well. We've seen lots of reports of call centers closing and things like that. So I really think because of all of that, it may take a little bit of time for some of this stuff to go into effect, but the fact that this is automatic for most borrowers will hopefully offer you a little bit peace of mind that this will happen for you.
Liz: OK, "most borrowers." But who's being left out?
Ryan: This is where my wonk hat really comes into play here. So all federal student loans right now come from what's known as the Direct Loan Program. That's your undergraduate loans, graduate loans, parent loans, and all direct loans will qualify for these new benefits. Now, before 2017, there was also a Perkins Loan Program. Now, those are federal loans that were issued by your school and those do not qualify for this benefit. If we go even further back in time, before 2010, there was what's known as the Federal Family Education Loan Program and they used to actually issue the majority of federal student loans at that point. It came from that program, and those were federal loans that came from private lenders and those also do not qualify on their own.
Now, the caveat with all of this is that some Perkins and FFEL loans are now held by the federal government and the actual language within the CARES Act is that federally held loans are eligible. You can see if that's the case with your loans by logging into your account at studentaid.gov and seeing who's listed as the loan holder. If it's the Department of Education for those Perkins or FFEL loans, then you should be good. If the Department of Education is not listed, you can consolidate your loans into the Direct Loan Program to make them eligible for these new benefits. But just know that consolidating your loans will eliminate any of the benefits that are already tied to your existing loans. Perkins loans, for instance, have their own student loan forgiveness program that you would then miss out on. So you definitely want to weigh those benefits versus any new benefits that you gained from the CARES Act.
Sean: We've talked a lot so far about people who are having trouble making their payments and needs student loan relief. What about people who still have an income and want to keep making payments on their loans? What about that?
Ryan: If you don't need that money for something more important, then you should definitely consider still repaying your student loans. As I've said before and can't emphasize enough, there is no forgiveness. So none of your loan is going away without you paying it and actually during the six month time when interest isn't accruing, your entire payment will go toward your principal. So you're even getting a little bit of a discount if you're paying right now.
Liz: I just wanted to add a thought that most people out there really don't have sufficient emergency funds, and yes, your student loan debt will still be there, but if you could beef up that emergency fund with the payments that were going toward the student loan, I think that might be a really good place to put the money.
Sean: One thing I want to add on to that is that you don't even need a huge emergency fund. We've heard guidance of three to six months and yes, that would be great in an ideal world, but there was a study from the Urban Institute that found that savings of even $250 to around $750 can be enough to save families in a credit and cash crunch and that families with lower incomes that have a little bit of savings are more financially resilient than middle-income families with no savings. So I think that's a great use of this money. If you aren't going to be paying your loans, maybe build up that emergency fund because we don't know what's coming around the corner.
Sean: OK. Well, back to student loans here. I want to talk about other forms of relief for those who are struggling to pay their student loans. We're seeing record numbers of people who are filing for unemployment, for example, and student loans are probably the last thing they want to think about. What options do people have?
Ryan: Yeah, so as we talked about before, the automatic payment suspension will at least help those borrowers in the short term, but I would advise them not to entirely put student loans out of their mind because they'll need a plan for after those payments come due again. And again, you will owe just as much at that point as you do today. So there are a couple options to consider if six months from now you're still struggling with those student loan payments or having to catch up on some of your other bills.
Now, one would be an unemployment deferment and that will let you continue to pause your payments. So no payment would be due if you're still looking for work or if you're underemployed at that point. And the nice part about the unemployment deferment besides the fact that the loan payment isn't due is that if you have subsidized loans, they also won't accrue interest at that point. So again, it's like a no-cost pause to your student loan payments. And you can apply for that deferment with your servicer and it's granted in six-month increments. So it's a good short-term option for borrowers who are still dealing with that issue down the line.
If you've experienced a long-term change to your income, what you might want to do is consider enrolling in an income-driven repayment plan, and that's going to align your payments with your income and hopefully give you an affordable bill moving forward. The interesting thing with income-driven payment plans is millions of borrowers are already using this option. So if you are and your income has changed, know that you can provide updated information to your servicer to recalculate the amount you owe so that when that bill comes due again in October, it is representative of your current financial situation.
And again, what we talked about before with servicers, that applies here too. So don't expect to submit your paperwork on like Sept. 29 and be good to go with a new payment when that first bill is due. Definitely use this break right now to get your application in early and stay ahead of things.
Liz: That's really good advice. OK, now what if you have private loans? Are private lenders offering any help?
Ryan: Yeah, so private lenders are offering some help. It hasn't gotten to the point of what the federal government is offering, but there are still options there now. What we've seen from a number of lenders is that they're offering a disaster-related forbearance, which is essentially they're allowing borrowers to pause their payments for 60 days or 90 days because of the coronavirus. Now, the difference with a private loan forbearance versus the administrative forbearance from the government that we've already talked about is that interest is going to accrue during that period. So it is something where the amount that you owe after the fact will be more than what it is right now.
We've also seen that some private lenders are waiving late fees, for instance, if you can't afford to make a payment. So you're not going to be hit with a fee as well because of that. But once again, there's nothing universal that's going on with private lenders. So really your best bet if you have private loans and you can't afford your payment is to reach out and discuss your options with your private lender to see what they're offering for you.
Sean: OK, as with most things, the onus is on the borrower to call the creditor and make sure they can take advantage of whatever programs may be available. All right, Ryan, one last question for you. What do you think borrowers should be watching out for? Are there any pitfalls here?
Ryan: Yeah, I'm going to hit three things very quickly. So one, we mentioned that tax refunds aren't being seized. Some borrowers will actually get their tax refund refunded if they filed after March 13 or if their refund was in the process of being seized as of March 13. If it was seized before then, then unfortunately, you're not getting that money back. Also, there's been some confusion for people who are pursuing loan forgiveness, whether these skipped payments will be eligible toward their payment count. The CARES Act makes it very clear that those payments do count toward the payment total that you need. And the third one, we've talked about it before as well, but I just want to emphasize, there is no student loan forgiveness as part of this bill. So if a company reaches out to you promising you student loan forgiveness or saying they can get cancellations for your loans or anything like that, be extra vigilant about what they're saying and probably not working with them.
Sean: OK, well, Ryan, thank you so much for talking with us. I really appreciate your help and I'm sure a bunch of student loan borrowers do too. This is all pretty confusing right now.
Sean: All right, and now let's get to our takeaway tips. Do you want to kick us off Liz?
Liz: Absolutely. The first, federal student loan borrowers are getting flexibility, not forgiveness. The government is pausing payments for most student loan borrowers until Sept. 30. During that break, no interest will accrue on those loans.
Sean: Next up, automatic does not mean instantaneous. You do not need to contact your loan servicer, but it could take a while for these changes to be reflected in your account.
Liz: Finally, reach out for more help. If the break in payments isn't enough or your loans aren't included, reach out to your loan servicer to discuss other hardship options. And that's all we have for this episode. Do you have a money question of your own? Turn to the Nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at [email protected] You can even email us voice memos of your questions. However you want to send them to us, it's just fine. Also, visit nerdwallet.com/podcast for more info on this episode. And remember to subscribe, rate, and review us wherever you're getting this podcast.
Sean: And here is our brief disclaimer, thoughtfully crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This Nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.
Liz: With that said, until next time, turn to the Nerds.