You’ve seen the headlines: Stop paying your student loans!
But can you really? And should you?
If you have federally held student loans, the U.S. government’s $2.2 trillion coronavirus rescue package covered a forbearance period that lasts until Sept. 30, 2020. Benefits include a suspension of payments and 0% interest.
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Note that the suspension does not mean that the federal government is making your student loan payments for you — you’ll just be free of making loan payments for six months without accruing interest or incurring late fees during that period.
So should you accept the forbearance? What if you have other loans — is there any relief from paying those? We’ll take a look at options for each of your loans and repayment programs.
Can Student Loan Forbearance Help You?
Let’s start with the facts: Federally held student loans are in forbearance until at least Sept. 30, 2020. You don’t need to decide whether you should ask for a forbearance — it’s automatic.
The waiver covers all loans owned by the U.S. Department of Education, which includes Direct Loans, subsidized and unsubsidized Stafford loans, Parent and Graduate Plus loans, and consolidation loans.
Even if you’re trying to rehabilitate defaulted student loans, the suspended payments will count toward your rehabilitation.
It pays to check your paycheck — there are already lawsuits against the DOE claiming unlawful wage garnishment, which was supposed to be suspended during the forbearance period.
The waiver does not cover privately held loans, which includes the majority of the outstanding 1.9 million Perkins loans and 11.8 million Federal Family Education Loans.
We’ll break down your choices further, based on the types of loans and repayment plans.
1. Do You Have Federally Held Student Loans on a Standard Repayment Plan?
If you have federal student loans and are on a standard repayment plan, you basically have two choices, according to Scott Snider, Certified Financial Planner and founding partner of Mellen Money Management.
“Either you’re trying to be aggressive in paying down your debt, or you’re trying to minimize your payments as much as possible,” he said. “If you’re trying to minimize your payments as much as possible, don’t pay.”
If you’re on a standard repayment plan and you’ve lost income, the forbearance period allows you to hold onto the money that you’d normally be sending toward student loan payments.
If you can still pay during the forbearance period, ask your servicer to continue automatic payments to avoid having to re-adjust to the withdrawal when auto-debit resumes.
Additionally, you might consider applying for an income-driven repayment plan, which could substantially reduce your monthly payments when the forbearance period ends. If you’re interested in consolidating, you’ll need to call the Education Department’s Default Resolution Group at 800-621-3115
The tradeoff of a consolidation is you’ll end up paying more in interest over a longer period before your loan is forgiven — with taxes due on the forgiven balance. So weigh that option carefully.
However, if you haven’t lost your job, Snider recommended this as an opportunity to get ahead on your loans. Your entire monthly payment will go toward the principal after paying off any previously accrued interest, which could help you put a real dent in your total.
Even if you can’t make the full payment, your loan servicer can accept a partial payment that, again, will go toward paying down your balance.
2. Are Your Federally Held Student Loans on an Income-Driven Repayment Plan?
If you are on an income-driven repayment plan, pay nothing during forbearance. (Whew, for once!)
That’s because the goal of these plans is to reduce payments to reasonable amounts as you work toward loan forgiveness.
Making additional payments only reduces a balance that will eventually be forgiven, so there’s no reason to make payments during forbearance, according to Snider. And those non-payments still count toward the total number of required installments to qualify for forgiveness.
“Take advantage of the six months of relief,” he said.
If you lose income during the forbearance period, you can still update your information on the Department of Education website and calculate a new payment amount. That way, when the forbearance period ends, you can start making the lower payments.
3. Are You Working Toward Public Service Loan Forgiveness?
If you’re already on track for Public Service Loan Forgiveness — you have a direct loan, you’re on an eligible repayment plan and you work for a qualifying employer — then you can take advantage of the six months of relief. Those zero-dollar payments still count toward your total to earn forgiveness.
But there’s an exception.
If you’ve lost your job or have had your hours cut to less than the 30-hour minimum, your non-payments will not count toward forgiveness (but you still don’t have to pay). PSLF does not require consecutive payments, so you can still use the forbearance if you think you’ll return to your non-profit or public sector job.
However, if you lose your qualifying job and you get a private-sector job instead, your payments will no longer count under the program. Unless you go back to a public service job, your loans will not be eligible for PSLF.
4. Are Paying Off Privately Held Loans?
If you have commercially held FFEL loans, you can still potentially qualify for forbearance in two ways: Either your loan servicer can voluntarily offer you forbearance or you can consolidate your loans into a Direct Consolidation Loan.
Because FFEL loans are federally backed, there’s a good chance their servicers will offer the same options that federally held student loan borrowers are receiving.
“With the FFEL loans, the servicers can voluntarily do the same kind of forbearance that the direct loans are going to now receive from the government,” said student loan attorney Christie Arkovich. She noted that programs vary by lender, so it’s essential to call instead of assuming you can get forbearance.
The second option, consolidation, will turn your FFEL loans into a federally held loan, allowing you to qualify for forbearance.
If you’re consolidating loans, do not add in any Parent Plus loans — Arkovich warned you’ll no longer qualify for many income-based repayment plan options if Parent Plus loans are included.
However, if you’ve been in an income-driven repayment, you’ll be starting over on your path toward forgiveness and any accrued interest will capitalize when you consolidate. And the interest rate on your consolidated loan could end up being higher than your current loan.
“Generally speaking, if they’re not too far into their FFEL loans, we will often recommend people consolidate their FFEL loans,” Snider said. “But with the caveat that you’re losing whatever was accrued toward any potential forgiveness.”
If you’re having trouble making the payments on your institutional-held Perkins loans, your best course of action is to reach out to your school’s financial aid office or the loan servicer who handles them for your college.
For other commercial student loans, you won’t qualify for the federal forbearance, but there’s a good chance you can negotiate your private student loan payments given the current circumstances.
5. Do You Have Multiple Student Loans?
Ever heard the phrase “rob Peter to pay Paul”? It means taking the money intended to pay one bill and using it to pay a different bill — usually inadvisable, as you’re just trading one debt for another.
If you have both federally held and commercial student loans, now may be a good time to rob Peter to pay Paul without being penalized.
Not sure who holds your student loans? Call your servicer to confirm. And remember, just because one loan is federally held doesn’t mean the other one is, so check on the status of each.
“Use those funds that you were paying on the direct loans to pay down the FFEL loans or the private loans,” Snider said. “Because oftentimes [private loans] are going to be at a higher interest or those are more of the problem child.”
By using this forbearance period to your best advantage in regards to your student loans, you may even emerge from the pandemic in better financial shape than when you started.
Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.
This was originally published on The Penny Hoarder, a personal finance website that empowers millions of readers nationwide to make smart decisions with their money through actionable and inspirational advice, and resources about how to make, save and manage money.
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