Understanding the CARES Act student loan relief

By Todd Mora, Program Manager, Sanford Center for Financial Planning and Wellness

CARES Act paper and pen graphicIncluded in the Coronavirus Aid, Relief and Economic Security Act (CARES Act) is relief for students who have federally-owned student loans. The key to understanding what relief or forbearance is available is knowing what kind of student loans you have. There are basically four types of federal student loans:

Direct Subsidized Loans are loans made to eligible undergraduate students who demonstrate financial need to help cover the costs of higher education.

Direct Unsubsidized Loans are loans made to eligible undergraduate, graduate and professional students, but eligibility is not based on financial need.

Direct PLUS Loans are loans made to graduate or professional students and parents of dependent undergraduate students to help pay for education expenses not covered by other financial aid. Eligibility is not based on financial need, but a credit check is required. Borrowers who have an adverse credit history must meet additional requirements to qualify.

Direct Consolidation Loans allow you to combine all of your eligible federal student loans into a single loan with a single loan servicer.

If you are unsure what types of loans you have, you can check at: https://studentaid.gov/fsa-id/sign-in/landing

I would strongly recommend that if you do not have a list of your outstanding student loans by type and amount, you create one at this time. Include the interest rate you are paying, along with the balance. Update this at least quarterly, so you are always aware of what you owe.

The relief granted in the CARES Act superseded the executive order issued by President Trump in March of 2020. It expanded the range of relief for federal student loan borrowers. The basic relief offered in the CARES Act includes:

1.    Immediate forbearance of all federal student loans. In this context, forbearance is the suspension of payments until September 30, 2020. The CARES Act forbearance includes loans that were in collections and all related garnishments. The forbearance was automatic. If you made a payment in March and are experiencing financial difficulty, you may be able to get a refund of that payment. You will need to contact your loan servicer to find out how to apply for the refund.

2.    The interest rate for all loans was lowered to 0% until September 30, 2020. That means for six months you will not accrue any additional interest charges. Additionally, if you are able to continue to pay your student loans, all your payment (after any accrued interest) will be applied to the principle amount of your loans.

3.    All payments not made under forbearance, through September 30, 2020, will count toward Income Driven Repayment Plans and Public Service Loan Forgiveness plans.

4.    All collections and garnishments for delinquent student loans have been suspended until September 30, 2020. If you are eligible for a stimulus check or tax refund, it will not be garnished for your delinquent student loan payments. If your Social Security payments were being garnished because of delinquent student loans, those garnishments will also cease.

5.    Employers can pay up to $5,250 of an employee’s student loans tax-free during 2020.

The above relief items apply to people who are currently paying on student loans. If you are currently in school or are graduating, you still may see some relief from the CARES Act. Current students who have federal student loans will benefit from the interest rate dropping to 0% until September 30, 2020.

Additionally, parents and graduate students who have Direct PLUS Loans will also have their payments put into forbearance and the interest rate dropped to 0% until September 30, 2020. Parents or graduates who have their Direct Plus Loans in the deferment program will have their interest reduced to 0% until September 30, 2020.

The United States Department of Education continues to issue clarifications for all of the above programs at https://studentaid.gov/announcements-events/coronavirus. Check the site periodically to make sure you stay current on new developments.

For those who have private student loans, there are relief programs. The amount of relief and conditions vary by lender. I recommend contacting your lender and asking what COVID-19 relief programs are available.

The Sanford Center for Financial Planning and Wellness is a student resource at Western Michigan University, and we are here to help. If you are experiencing financial difficulties and would like free coaching, please feel free to contact me via email or (269) 760-1719.