UPDATED August 12, 2020: On August 8th President Trump signed an executive order that extended the suspension of federal student loan repayment and interest accrual through December 31, 2020.
Whether you are a current or former college student with school loans, you have financial decisions to make due to the COVID-19 pandemic. The recently passed CARES Act provides relief for federal student loan borrowers, but you may need to quickly pay back your 529 plan for any refunds received for college expenses.
Federal Student Loan Borrowers
Thanks to the CARES Act, payments are temporarily suspended for federal student loan borrowers with direct loans or parent PLUS loans. Regardless of your federal student loan servicer (likely Nelnet, Navient, Great Lakes, or FedLoan), you should have received communication that your loans are now in “forbearance” until December 31, 2020.
What does forbearance mean? Borrowers of direct federal loans are not required to make payments for the next six months. Additionally, the interest rate on these federal loans is set at 0% until the forbearance period is over. No interest will accrue over this period. If you have automatic payments set up, your student loan servicer has likely already changed your next payment to debit after December 31. And, if you made a payment after March 13, 2020, you can request a refund from your loan servicer.
For those hoping to eventually have federal loans forgiven through the Public Service Loan Forgiveness (PSLF) program – read closely. The CARES Act allows for those working full-time for a qualifying employer during the forbearance period to receive credit toward PSLF throughout the initial period (ending September 30, 2020) as if you made on-time payments. Trump’s executive order that extended the forbearance period does not apply toward the PSLF program, although the suspension of interest accrual does. If you’re following PSLF guidelines, you should begin repayment of your loans come October 1st.
If your federal student loans are currently in default, the CARES Act stipulates all collection efforts such as wage, tax refund, and Social Security benefit garnishment will be paused until December 31. Private collection agencies contracted through the U.S. Department of Education have also been instructed to cease collection calls during this time.
Unfortunately, private student loans are not eligible for the same forbearance provisions. If you have private loans and would benefit from assistance during this time, contact your loan servicer directly. Some private loan servicers are offering options due to the pandemic.
Loan Repayment Strategy
Should you continue making payments on your federal student loan debt during forbearance if you are able? It depends. Start with answering these questions, in order:
- Do you have an emergency fund established with 3 to 6 months of living expenses?
If the answer is no, redirect student loan payments towards building your emergency fund first. - Do you have other outstanding debt with higher interest rates than your federal student loans (think credit card debt, car loans, etc.)?
If the answer is yes, redirect student loan payments towards paying off higher interest debt first. - Do you have an established emergency fund and all other outstanding debt has a lower interest rate than your federal college loans?
If the answer is yes, there are definite benefits to continuing to repay your federal student loan debt.
Why keep paying your student loans? Since federal student loan debt will not accrue any interest during the six-month forbearance period, the full payment made during this time will be applied directly towards the principal. This strategy will allow you to pay down your principal balance at a quicker speed. If you want to continue making payments, you will need to contact your federal student loan servicer directly and make the payments manually via your online account.
529 Plans: Tuition, Room and Board Refunds
Since many campuses across America closed for the spring semester due to coronavirus concerns, universities and vocational schools have switched to online learning or canceled classes completely. Because of this, many students and parents may receive partial or full refunds of any money previously paid for tuition, room, and board for the current semester.
Families that distributed funds from 529 plans to cover these expenses have 60 days to re-contribute any refunded payments made from 529 plans. If refunded 529 plan monies are not re-contributed, income taxes and a 10% penalty could potentially be owed on the refunded amount.
Summary
Do you have more questions on the intricacies of the CARES Act federal student loan forbearance? If so, visit: studentaid.gov/coronavirus.
If you are fortunate enough to continue making payments on your federal student loan debt, make sure your emergency fund is established, and your higher-interest debt is paid off first. Lastly, for families with college students and 529 plans, pay attention to those refunds! You have 60 days to re-contribute and avoid taxes and penalties.
Please remember that past performance may not be indicative of future results. Prior to implementing any investment strategy referenced in this article, either directly or indirectly, please discuss with your investment advisor to determine its applicability. Any corresponding discussion with a Bedel Financial Consulting, Inc. associate pertaining to this article does not serve as personalized investment advice and should not be considered as such.
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We have helped our clients answer these questions and more. If you want a clear understanding of your financial future, and need help making changes to reach your goals, schedule a consultation and we can get started.
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