CARES Act: The Reality For Borrowers
On March 27th, the CARES Act was signed into law and had far reaching changes to the existing COVID-19 rules for borrowers. For all federally-held student loans:
Monthly payments are automatically suspended
Interest is set to 0%
Wage garnishment of defaulted loans is halted
This “suspension period” is in effect from March 13th — September 30th and these changes are applied retroactively. The “suspension” periods count towards forgiveness programs (including PSLF) and are registered with the credit bureaus as on-time payments. Anyone who has made a payment after March 13th can request a refund.
Servicers have their work cut out for them. Similar to the PPP loans for businesses, the guidelines are fluid and ever-changing. We want to share what we know and how the student loan ecosystem at large is going to be affected.
TLDR: These changes are great news for borrowers in general. The government basically put in place a new loan status that is very similar to natural disaster forbearance, but honors those periods as counting towards forgiveness. Now is a great time for borrowers to evaluate repayment options and switch, especially if they’ve lost income recently. Many can lock in $0 payments for the year.
6.5 month COVID-19 suspension
Without any action from a borrower, they will enter a COVID-19 specific status where $0 payments are the new normal until September 30th. Servicers are required to rollout these changes starting April 11th per the regulation in the CARES Act.
Borrowers can still voluntarily make payments, but we’re not sure who in their right mind would. Possibly PSLF candidates who are worried about FedLoan messing up their PSLF count? Or someone who wants to accelerate prepayment on a fixed payment loan? Either case would be financially unwise since the loans are at 0% interest, making this an actual pause where you can build up cash reserves.
Servicers are expected to stop collecting direct deposit payments at the end of this week. If borrowers want to make sure they don’t have to pay during this suspension, they can turn off auto-pay to make sure funds aren’t being withdrawn.
Interest set at 0% — for longer
The CARES Act extended Trump’s interest waiver where the government is giving up roughly $6.7 billion in interest income per month.
Given the duration of this suspension period (6.5 months), the grand total in lost income to the government is $43.55 billion.
So the bill was actually closer to $2.24 trillion 😁
Refunds!
If a borrower has made a payment since March 13th, they can request a refund — if they don’t, the payment will be applied first to outstanding interest then principal.
Requesting a refund will always be preferable since the payment still counts. Also, borrowers on income-driven plans (in many cases with outstanding interest) are relying on a forgiveness event. Paying more today means less forgiveness for them tomorrow, so they’ll want to keep payments from being applied to their outstanding interest.
The good news: servicers are great at refunding borrowers. They already have solid processes in place so borrowers can feel comfortable that if they ask for the refund they will get it.
However…. getting on the phone with a servicer is going to be extra tricky right now. We’ve seen several examples of call center shortages given the overwhelming call volume of inquiries. Lots of servicers are communicating closed call centers and relying on alternative channels to connect (social media, email, etc):
FedLoan Homepage a few weeks back
The best move if a payment was made after March 13th: contact a servicer to confirm that the payment will be refunded (typically this takes 60 days).
Wage garnishment of defaulted loans is halted
Borrowers who are in default for more than a year on federally-held loans start to have their wages garnished, tax refunds withheld and / or social security benefits taken to help repay the debt.
The default process deserves its own post, but borrowers in this category have opportunities to recover through either rehabilitation or consolidation.
The CARES Act puts this process on hold — prohibiting ED from garnishing wages, tax refunds or Social Security benefits to collect defaulted loans during the suspension period. Any action that was currently in progress is halted and any wages garnished through an employer after March 13th are refunded.
Open Questions
The “suspension” period begins March 13th. What about borrowers who have already entered the COVID-19 administrative forbearance?
It would seem that the servicers are planning to evaluate the status of a borrower’s account on March 13th, halt each loan’s status, then rewind it once the period ends October 1st.
Curiously, we’re hearing conflicting guidance on what happens if you’ve made changes to your plan since March 13th. Having the “frozen” version start April 11th could be disastrous for many borrowers.
As an example: if you’re a candidate for Public Service Loan Forgiveness and you entered administrative forbearance last month, it’s possible your account will be considered in “forbearance” when the servicer freezes the account. In order for the suspension period to count for forgiveness, you need to be in repayment!
We’ve seen borrowers wait years for an accurate count of their PSLF payments — so we’re not exactly confident this process is going to go smoothly. We’re keeping a careful eye on how this is being executed so we can share insights as we digest them.
Moving Forward
16.6 million Americans filed for unemployment in the last three weeks. With 1 in 5 Americans having some kind of student debt, there’s at least 3.3 million borrowers who just became unemployed in the last 21 days.
There has never been a more important time for borrowers to get great guidance on what do here. For borrowers who are experiencing a sudden drop or loss of income, enrolling in income-driven plans ASAP can lock in low payments (many at $0 / month) for the year while still taking advantage of the “suspension” period. Borrowers making adjustments now can lead to large savings down the line.
We’re happy to see these measures put in place for borrowers — now it’s all about how the servicers execute on that promise. We’ll be here to provide clarity and transparency through what is going to inevitably be a stressful and uncertain time for all student loan borrowers.
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