Financial Fundamentals Blog

How the CARES Act Affects Student Loans

Through the CARES Act, certain federal student loans – Direct Loans and Federal Family Education Loans owned by the United States Department of Education - are in forbearance until Sept. 30, 2020 without accruing interest, and servicers aren’t reporting missed payments to credit bureaus. Private loans, Perkins Loans and commercially-held Federal Family Education Loans are not eligible. While forbearance can be a great source of relief for people with federal student loans during this difficult time, it’s important to be aware of the current options surrounding student loan payments.
  1. Keep making your monthly payments as usual. If you haven’t been significantly impacted by the COVID-19 pandemic, you may decide to keep making your monthly payments. By continuing to make payments, you would avoid forgetting to get back on auto pay or to make monthly payments after Sept. 30, 2020. Continuing to make your regularly scheduled payments could also help you pay down your balance more quickly. Under the circumstances, your full payment would go towards the principal. The government has already paused all eligible student loans. If you want to keep paying down your student loan debt during this time, contact your student loan provider to set up payments.
  2. Put the money in a high-yield savings account, then pay a lump sum at the end of the forbearance period. If you’re in a financially secure place, and you aren’t worried about transitioning back into making payments in October, you may want to use the money you’re saving every month to your advantage. By putting the money you would normally spend on student loan payments in a high-yield savings account you can earn interest on your savings. At the end of September, take all of that money and make one lump sum payment on your student loans. Many high-yield savings accounts offer well over 1% Annual Percentage Yield, which is compounded daily and paid monthly. If you do it before the end of September (before the interest starts accruing again), all this money will go toward your principal.
  3. Keep your loans in forbearance now, then make regularly scheduled payments starting in October. If your finances have been impacted by the pandemic, don’t worry about using this time to pay down your student loans. It may be in your best interest to use that money in other ways right now. If you have high-interest debt elsewhere, now would be a great time to focus on paying those down or preventing the accumulation of greater debt.
It is important to note that the time in suspension counts toward forgiveness or loan rehabilitation. This means that for borrowers in an Income Driven Repayment Plan, the suspended payments are considered qualifying payments that can be counted toward forgiveness. Borrowers working toward Public Service Loan Forgiveness will also have time in suspension counted toward their 10 years of qualifying payments.

Whatever option you choose, make sure that you are taking care of the essentials – food and housing- first. While this forbearance is a great opportunity to get ahead if you haven’t been financially impacted, its main purpose is to provide relief.

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