On Friday, March 27th a CARES Act was passed to help Americans financially get through the Coronavirus Pandemic. If you are a student loan borrower or know of someone who has student loans this is a message for you.
Under the CARES Act all federal student loan payments are being suspended for six months (until September 2020) and during this time no interest is accruing on your balance. This payment suspension is an automatic action that your loan provider has to implement, however, we recommend that you confirm that they actually do this for you. There are different scenarios that we recommend for you depending on your situation.
If you are in an income driven repayment plan, whether you’re going for the 20 - 25 year student loan forgiveness or in Public Service Loan Forgiveness (PSLF) these six months of no payments are being counted towards your qualifying payments. If you are in one of those loan forgiveness programs we want to make sure that you’re not applying any payments towards those eligible loans. Instead, if you have private student loans or other debt (credit cards, auto loans, a mortgage, etc) and are able to afford to continue making payments we would like to see you applying the payment you would be making on your federal student loans to your other debt that has the highest interest rate. The reason for this is because you will be power paying on that debt which will save you money on interest in the long run, as your repayment period will be shorter on that debt.
If you aren’t in an income driven repayment plan but are still able to make your standard payment your entire payment will be applied towards your principal balance. Most student loan providers apply extra payments automatically towards the loan with the highest interest rate, but this is something you will want to confirm. If you continue making these payments during the six month period you will save yourself money in the long run on interest and be done with your student loan payments a little bit earlier than you otherwise would be.
Important note: Private loan borrowers need to contact their lender or service provider to confirm eligibility. Also, remember FFEL loans were issued under a system of private loan, subsidized and guaranteed by the federal government, they are not direct loans. However, the CARES Act specifically states Part D and Part B of the 1965 Higher Education Act, and FFEL loans fall under Part B.
I’m going to use my student loan as an example of the impact of continuing to make payments now. Here is a summary of my student loan balances and interest rates.
My standard monthly federal student loan payment is $138. During this six month period I’m going to continue making payments and will be applying the entire payment to my Direct Subsidized Stafford loan with a 4.2% interest rate. During this period my payments will total $828 ($138 x 6 months). That will leave $1,075 as a balance when interest starts accruing again, so that will reduce that particular loan by almost half. While the interest on this particular loan isn’t substantial I will still save money in the long run. Depending on when you went to college your interest rates may be higher, in which case your continuing to make payments will save you even more money than what I will be saving. Another factor in how much interest you will save in the long run depends on what your monthly payment is. The higher your monthly payment the greater impact you will have on interest savings. If I had private student loans with a higher interest rate I would want to make the additional payments on that loan instead to maximize my interest savings.
If you are able to continue making these monthly payments we strongly encourage you to do so. You will thank yourself in years to come.