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Your Student Loan Bill Is Still Due During the Pandemic

March 19, 2020
Loans, Student Loans
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If you have difficulty meeting student loan payments during the COVID-19 pandemic, the new policy announced by President Donald Trump on March 13 temporarily suspending federal student loan interest will not, by itself, lower your student loan payment.

But such an interest waiver makes other options for federal student loan relief more attractive, such as linking payments to your income, or using forbearance to suspend payments altogether. For borrowers with private loans, the recent interest rate cuts by the Federal Reserve may make refinancing a good strategy.

Here’s what you can do to lower your student loan payments or suspend them.

Adjust your repayment plan

For those having difficulty meeting payments, one solution is an income-driven repayment plan. It can lower your monthly bills based on your income and family size. If you’re out of work right now, your payment could be as low as $0. Only federal student loans qualify.

There are four different income-driven plans, but the most accessible is Revised Pay As You Earn, which caps your payment at 10% of your discretionary income and extends your loan term to 20 or 25 years. At the end of your loan term, the remaining balance is forgiven.

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The downside of income-driven repayment has always been that interest continues to accrue, increasing your overall balance because your reduced payments don’t cover all the interest. The new interest waiver means your total debt won’t grow, at least until the program ends.

If you are already enrolled in income-driven repayment and your income has changed, submit an early recertification form to update your income, which will adjust your payment.

If you have private loans, your lender may offer alternate repayment plans or short-term lowered payments. Ask about your repayment options.

Apply for a forbearance

If you are out of work or working significantly less than usual, you can seek a forbearance to pause payments.

Usually forbearance is considered a last resort because interest continues to build and is added to your total loan balance when the forbearance period ends. But with the interest freeze in place, interest won’t build. It also will not be calculated retroactively and added back to the principal when the policy ends, according to an Education Department spokesperson.

Contact your federal loan servicer — the private company that manages your loans — to request a forbearance. Forbearances typically last up to 12 months at a time, with no set maximum. Be mindful that the interest waiver may end at any time, restarting the interest clock.

How to choose? An income-driven plan can let you keep chipping away at your student debt, so it will be that much smaller when times improve (and interest starts accruing again). Also, you can stay on that plan as long as you need to, although you’ll have to recertify if your income goes up or down with a new job.

With federal forbearance, you’ll get some breathing room, but your debt will be the same size when the forbearance period ends, which is typically six months to a year. (Or, if the interest waiver ends while you’re in forbearance, your total debt will grow, as the new interest will accrue on your balance until you restart payment.)

Private lenders usually offer forbearances or hardship deferment, typically 12 months at a time, with no set maximum. But they have not, so far, agreed to waive interest.

How the interest waiver affects borrowers

Many details of the plan remain unclear and have not yet been described by the Education Department. However, most federal student loan borrowers are unlikely to see any change from the interest waiver. Their monthly payments will remain the same.

But, in addition to those needing forbearance or an income-driven plan, the waiver also benefits current students with unsubsidized student loans who are in academic deferment or graduates in their grace period. Interest won’t build on their loans while the policy is in place.

Loan servicers are working to implement the waivers now, but it will be retroactive to March 13, according to an Education Department spokesperson. It is in effect until further notice, the department says.

The loans impacted include direct subsidized loans, direct unsubsidized loans, parent and graduate PLUS loans and direct consolidation loans. It also includes any Federal Family Education Loan (FFEL) program loans and Perkins loans that are currently federally held. If you have FFEL or Perkins loans that are not federally held, you can consolidate into a direct loan and receive the interest benefit. But Perkins loans borrowers will no longer be eligible for Perkins loans forgiveness.

Private loans? Consider refinancing

If you have private student loans and a bulletproof job, now might be a good time to refinance. Interest rates have dropped significantly since the Federal Reserve cut rates to curb the outbreak’s effect on the economy.

Refinancing loans through a private lender can get you a lower interest rate and a new repayment term. You usually need a FICO credit score in the high 600s to qualify, along with a strong, steady income and low debt-to-income ratio.

Borrowers with private loans have little to lose with refinancing. Those with federal student loans should weigh benefits like income-driven repayment and opportunities for loan forgiveness before considering refinancing into a private loan.

Keep in mind: Since the pandemic has just begun, no one knows whether the interest waiver will be the last relief coming for student loan borrowers. Different programs may be announced if the economy worsens, and loans refinanced privately may not qualify.

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