The Second Stimulus Check And What Does It Mean For Student Loans

Earlier in March, the US government passed the CARES Act to help provide temporary relief measures to student loan borrowers. Sadly, the CARES Act doesn’t provide any relief to borrowers holding private student loans, private FFEL Loans, and student loans provided by the Department of Health.

The HEROES Act, supported by the Democratic House, is expected to roll out in August. Keep reading to learn more about this act’s additional benefits. 

What Are The Most Important Provisions?

According to the current $2 trillion stimulus package, federal student loan borrowers are eligible for a number of benefits such as:

• Suspension of all payments on federal student loans until September 30, 2020
• Temporary forbearance is applied automatically on all eligible federal student loans
• These six months of automatic forbearance counts towards the borrower’s ongoing loan forgiveness programs, including all income-driven repayments (PAYE, IBR, and REPAYE) and Public Service Loan Forgiveness (PSLF) programs
• During the period of automatic forbearance, no interest will accrue on the loan accounts. This will continue until September 30, 2020
• Employers who contribute to their employee’s student loans are entitled to a tax break
• Borrowers who have defaulted on their payments will now have these six months of forbearance count towards the nine months needed for loan rehabilitation
• All collection activities, including wage garnishment and seizure of tax refunds, have been paused

Stimulus Plan And Federal Loans 

Under the proposed HEROES Act, Congress has suggested many additions. Democrats have requested that the government should add a relief measure to provide $10,000 to $30,000 in student loan cancellations for each borrower. For instance, if 50 million borrowers receive $10,000 each as loan forgiveness, the total cost would be $500 billion.

Other Congress members have also suggested extending payment suspension for another year, until September 30, 2021. They’ve raised concerns about the uncertainty of income and the economic impact due to the rise in COVID-19 cases. If cleared, the bill would be extremely beneficial for federal student loan holders who are already enjoying many of the benefits provided under the CARES Act.

Stimulus Plan And Private Loans

The CARES Act overlooks private student loans. However, according to the proposed changes in the HEROES Act, the US Treasury is urged to cover the monthly payments on these loans until September 30, 2021, with a total payment capping of at least $10,000 per borrower. 

The act also suggests that these loan accounts shouldn’t be reported to the credit bureaus and that interest mustn’t be capitalized on them during the suggested time period. Additionally, lenders should suspend involuntary collections until further notice.

The bill also suggests that any loan payments made during this time shouldn’t reset the clock on the ongoing statutes of limitations. Lenders must be willing to agree to modify existing loan terms and provide borrowers with a revised pay-as-you-earn (REPAYE) repayment plan. 

Another suggestion says that within 90 days of September 30, 2021, the U.S. Treasury should forgive up to $10,000 in private student loans per borrower or the unpaid balance of the loan, whichever is less. The pardon would be limited by the amount of private student loan contributions already contributed by the U.S. Treasury. 

How To Help Borrowers In Default

Many borrowers have already defaulted on their payments. A good way to reset the clock on defaulted federal loans is to make nine consecutive payments. However, borrowers can’t make consecutive payments to get their loans rehabilitated. 

As per the CARES Act, all collection activities, such as garnishment and seizure of tax refunds, are to be stopped until further notice. Additionally, the automatic suspension of payments for six months will be counted towards the nine months needed to rehabilitate the account. Defaulted borrowers will only have to make three consecutive payments to get their loans out of default.               

How Can You Reduce Your Debt In The Meantime?

While new decisions are yet to be agreed upon, there are several ways to reduce your debt in the meantime. For instance, talk to your lender about refinancing. You could also temporarily take a break from your payments. 

Refinance/Consolidate 

If you have a private student loan, you can get a lower rate of interest when you refinance now. Due to COVID-19, many lenders are offering record low rates. If you’re still employed and have a good credit score, you can save a lot of money by refinancing your current loan. If you want to lower the total interest, it’s a good idea to refinance the loan with a shorter repayment term. 

On the other hand, if you’re looking to lower your monthly payments then choose a refinance option with extended repayment terms. Check your eligibility by comparing offers from different lenders online. Use an online calculator to get a rough estimate of how much you can save by refinancing.

Income-Driven Repayment Plan

If you have a federal student loan and are struggling to afford monthly payments due to low income, you can enroll in an income-driven repayment plan. The lender will set an affordable amount depending on your location, income, and family size. 

The federal government offers four repayment programs. These programs are pay as you earn (PAYE), income-based repayment (IBR), income-contingent repayment (ICR), and revised pay as you earn (REPAYE). Speak to your lender to learn more about these and choose an option that fits your needs.

Tax-Free Student Loan Forgiveness

Depending on your occupation, you may be eligible for the federal government’s loan forgiveness programs. For instance, government employees and those working for not-for-profit organizations may be eligible for Public Service Loan Forgiveness (PSLF) programs. Teachers working at low-income schools or educational services can also apply for the Teacher Loan Forgiveness program. All forgiven amounts under these programs are tax-free.

Give A Break To Your Payments

If you have a federal student loan then you’re already eligible for six months of forbearance at 0% interest. You can use this relief measure to temporarily pause your payments until September 31, 2020. Additionally, you can also ask for refunds for payments made after March 13, 2020. Speak to your lender to see if you can avail of this benefit.

Bottom Line

The Senate is expected to give a final decision on the HEROES Act by the first week of August 2020. If you hold a federal loan, make sure to utilize the benefits offered under the CARES Act. If you’re holding private loans, use the options listed above to help reduce your debt.