Federal student loan borrowers have caught a break on payments. But should they take it?
Federal student loan borrowers are in luck (relatively speaking, at least). Thanks to the Coronavirus Aid, Relief, and Economic Stimulus (CARES) Act , Americans with federal student loan debts can postpone payments from March 13 through Sept. 30.
There are no late fees for a missed payment during this time and zero-interest is earned on the balance — however high it may be — until Oct. 1.
For borrowers struggling financially due to the ongoing pandemic, the break on school loans is welcome news, freeing up much-needed cash for bills, essentials, and other must-haves. But what if you’re not struggling or haven’t seen lost income due to COVID-19? Should you still pause payments on federal loans? That’s another story.
Should you stop paying federal student loans during coronavirus?
Though the CARES Act offers you a break on federal student loan payments, you still have repayment options. In fact, if you have the financial means to do so, you might consider continuing to repay your school loans.
WHY YOU'LL LIKELY SAVE MONEY IF YOU REFINANCE STUDENT LOANS NOW
To understand your full range of repayment options, though, it’s important to know what type of loan you have. If you have a loan owned by the government, your loan will qualify for federal student loan forbearance under the CARES Act. But many loans - even some that were “federal” loans when you initially got them - may now be held by private lenders and will not qualify. Your best bet is to call your servicer (the company you make your payments to) to confirm which camp your loans fall into.
Loan options to save money and pay off debt quicker
Refinance your student loans
If you're looking to save money during this time and aren't in any sort of financial hardship, refinancing your private student loans is a solid option, especially given the low-interest-rate environment we’re currently in. Don't forget to thoroughly research rates from multiple lenders before making a move.
Doing so could reduce your interest costs and lower your monthly payment, making it easier to stay current on your loans, despite what financial struggles you may be going through.
If this is a route you’re considering, tools like Credible can make comparing your refinance options (and rates) easy.
If you have private loans or former federal loans that don’t qualify for the CARES Act relief provisions, you can:
Ask your lender about hardship options
“If the loan is a private student loan or otherwise not owned by the Department of Education, contact the lender regardless to explain the financial hardship and ask if any relief options are available,” said Leslie Tayne, founder and head attorney at debt relief law firm the Tayne Law Group.
Tayne continued, “Many private lenders are offering various forms of assistance, which may include forbearance, late payment forgiveness or lower interest rates. However, these options are not automatic with private student loans, so borrowers will need to contact their lender directly."
Take the forbearance and pause payments
If you're going through a difficult time, however, you should just take the break in student loan payments and enjoy it. Use the extra funds to cover your bills, increase your emergency savings, or pay off other, higher-interest debts. If you go this route, there’s nothing you need to do, according to Amy Lins, senior director of learning & development at Money Management International.
WHAT'S A STUDENT LOAN GRACE PERIOD?
“During this period, federal student loan borrowers do not need to take any action for their student loan payments to receive administrative forbearance,” Lins said. “Their loan servicer will automatically suspend the payments.”
Pause now and restart later
You could also pause your student loan payments for now, and restart paying down your loans when you’re back on your feet financially. For this path, you’ll need to either contact your loan servicer or make manual payments through your bank’s bill pay system or via mailed check.
“To opt-out of the administrative forbearance, a borrower can contact their loan servicer and have them resume auto-draft,” Lins said. “However, a borrower can also make manual student loan payments. This means they can keep the forbearance in place just in case they need it down the road while making full or partial student loan payments through their servicer’s website.”
Keep repaying your debt as normal
Another option is to just keep your original student loan repayment plan and make your student loan payments as normal. Again, you’ll need to make manual payments or contact your servicer to re-establish autopay, but the benefits could be well worth the effort — especially if it won’t hurt you financially elsewhere.
Tayne said you might even consider larger-than-normal payments if possible.
HOW LONG WILL IT TAKE TO PAY OFF YOUR STUDENT LOAN?
“Those that are close to paying off their loans may wish to continue payments because they’re approaching the finish line,” Tayne said. “Additionally, if you are fortunate enough to have extra funds during this time, you may consider making even larger payments towards your student loans because they will go further in expediting your repayment.”
What happens if you’re behind on student loan payments?
The good news is that the CARES Act even applies to federal student loan borrowers who are behind on their payments or in default. In fact, all payments during the six-month period will actually be counted as on-time payments, and no additional interest will accrue until October.
Even better, the act pauses all collections activities, too.
WHY DEFAULTING ON A STUDENT LOAN IS A BAD IDEA
For borrowers who are applying for Public Service Loan Forgiveness or who are in the process of rehabilitating a loan in default, all paused payments during the forbearance period will count as qualifying payments.
How to use coronavirus stimulus benefits to pay down loan debt faster
Continuing to make your monthly payments despite qualifying for relief could help you pay off those student loans faster — and with less interest paid. Refinancing your loans or consolidating them into a single, lower-interest package could help you speed up loan repayment as well.
Finally, you could also use your government-paid stimulus check to make extra payments on your student loan balance.
“If you received a stimulus check and are current on other bills, consider making a loan payment with a portion of the stimulus funds," Tayne said. “Doing so will go towards the loan principal and allow borrowers to pay down their balances faster and reduce the amount of debt they’re carrying.”