What you need to know about debt relief on student loans
The $2 trillion stimulus relief prompted by the extraordinary economic downturn provided some financial relief for federal student loan borrowers. But is it enough?
House Democrats have introduced a $3 trillion stimulus package, the Health and Economic Recovery Omnibus Emergency Solutions (Heroes) Act, which extends and expands debt relief to federal and private student loan borrowers.
Here are answers to common questions about student loan relief during the pandemic.
Q: What’s in the Heroes Act?
A: This bill would extend the relief provided for federal borrowers in the Coronavirus Aid, Relief, and Economic Security (Cares) Act. The Cares Act automatically suspended interest, payments and involuntary collection until Sept. 30 for most people with federal student loans.
The Heroes Act would extend the payment break and interest waiver for another year to Sept. 30, 2021. The proposed legislation would also forgive up to $10,000 in debt for federal and private student loan borrowers.
But this stimulus aid package has a difficult road to passage.
“Republicans rejected the legislation even before they saw it, describing it as a liberal wish list that would go nowhere in the Republican-led Senate,” reported The Washington Post’s Erica Werner. “The massive new Democratic bill was assembled by House Speaker Nancy Pelosi (D-Calif.) and her top lieutenants without input from Republicans or the Trump administration. It’s less an opening bid in a bipartisan negotiation than an expression of House Democrats’ priorities that they hope will resonate with the public as the nation suffers through the worst economic calamity since the Great Depression.”
Q: Which of my loans are eligible for a payment pause under the Cares Act?
A: To find out if your loans qualify, ask your student loan servicer, or go to StudentAid.gov/login. You can also call 800-433-3243.
Any loan owned by the federal government is eligible, including some originated through the defunct Federal Family Education Loan (FFEL) program and those in the Education Department’s Direct Loan program.
About 9 million people are ineligible for the congressionally mandated reprieve because their federal loans are held by private companies. Most of those borrowers have older loans from the FFEL program. Others have federal Perkins loans for low-income students that are owned by colleges and universities.
People with commercially held FFEL or Perkins loans can consolidate their debt into the Direct Loan program — where loans are made and held directly by the feds — to take advantage of the interest waiver and payment suspension provided by the Cares Act. But that process could take some time, and unpaid interest will be added to your balance.
Borrowers with education loans from banks or other financial firms are not included in the Cares Act and therefore excluded from the automatic payment suspension.
However, many private lenders, including Discover Financial and Wells Fargo, are allowing people to postpone their payments, although interest will still accrue.
Ten states and the District have reached agreements with student loan companies, offering a lifeline to millions of people with debt held by private outfits. The multistate agreement includes California, Colorado, Connecticut, Illinois, Massachusetts, New Jersey, Vermont, Virginia, Washington and the District of Columbia.
A dozen loan servicing companies, including Navient, Nelnet and Aspire, will let borrowers postpone their payments for 90 days without the threat of late fees or negative impacts on their credit ratings. The companies also will hold off on filing debt collection lawsuits during that time and help eligible borrowers enroll in payment plans tied to their income.
New York state struck a separate deal with student loan companies in April, providing up to 90 days of forbearance.
Q: How will forbearance affect my credit?
A: The Cares Act suspends negative credit reporting for eligible federal student loans. This means the Department of Education is supposed to report suspended payments to the major credit bureaus as if they were made on time.
But check your credit reports to be sure this is happening. Because of the coronavirus, the three major credit bureaus — Equifax, Experian and TransUnion — are offering free weekly online credit reports through April 2021. Go to annualcreditreport.com to request the reports.
If your loans are reported as late, contact your loan servicer. If you don’t feel satisfied with the response, submit your grievance through the Consumer Financial Protection Bureau’s complaint portal.
Q: How will forbearance impact my Public Service Forgiveness Loan?
A: If you qualify for the Public Service Loan Forgiveness (PSLF) program, the suspension of loan payments won’t put you behind. It will be as if you made on-time monthly payments.
But it’s important that you fully understand this program; otherwise, you may find you don’t qualify for forgiveness.
Under the PSLF program, the remaining balance of a borrower’s debt is forgiven after 120 qualifying monthly payments. Here’s where there is often a lot of confusion.
Only federal Direct Loans are eligible for PSLF. You have to be paying off the debt under a certain type of income-driven repayment plan while working full time for a qualifying employer.
Borrowers often believe the forgiveness is based on the type of job they do, but to qualify for the program, it’s all about the employer.
For PSLF eligibility, you must work (or volunteer) in public service for one of the following:
— A government organization (federal, state, local or tribal).
— A not-for-profit that is a 501(c)(3) tax-exempt organization as determined by the IRS. (Other not-for-profit organizations that don’t have the 501(c)(3) exempt status may still count toward qualification forgiveness. This would include certain types of public-service jobs in law enforcement, military service and education.)
— AmeriCorps or the Peace Corps.
To get full details of what employers and student loans qualify for under PSLF, go to studentaid.ed.gov.
The program can provide a great amount of financial relief. Instead of 20 or 30 years of monthly student loan payments, borrowers can be debt-free in 10 years (120 payments). And the forgiven amount is not taxable.
There has been a lot of controversy about PSLF.
Many borrowers found out after making what they thought were qualifying payments that in fact they weren’t on track to get rid of their debt. They didn’t work for the right kind of employer, they didn’t have a Direct Loan, or they weren’t in an income-based repayment plan.
So, you are right to want clarification about the automatic pause in PSLF payments under the Cares Act.
Q: What if I was in default on my student loans?
A: “If you’re already in a rehabilitation agreement, all of your suspended payments will count,” the Department of Education said in a summary of coronavirus-related loan relief. “If you enter a new rehabilitation agreement between March 13, 2020, and Sept. 30, 2020, suspended payments that would have been made from the beginning of your agreement until Sept. 30, 2020, will count.”
There’s additional financial relief available. If your 2019 tax refund was taken to repay a defaulted student loan, you can get the money back. But this provision only applies if the refund was in the process of being withheld on or after March 13 and before Sept. 30, 2020. People who receive Social Security, including disability benefits, can also get an offset returned if it was made during the same period. For more information, call the Education Department’s Default Resolution Group at 800-621-3115.
Q: What should I do if my employer is garnishing my paycheck for past-due student loans despite a moratorium on collections?
A: In March, the Trump administration imposed a 60-day moratorium on the collection of defaulted student loans by the federal government during the coronavirus pandemic. The Cares Act extends the moratorium through Sept. 30.
Despite the federal moratorium, people have complained that their wages are still being garnished. A group of borrowers filed a class-action lawsuit in April against Education Secretary Betsy DeVos and the Education Department for allegedly mismanaging the moratorium. A federal judge in the case requested the department report on its progress in suspending garnishments.
The Education Department said it has mailed letters to 83,500 defaulted borrowers explaining that their employers should stop garnishing their wages. The federal agency is also trying to contact an additional 4,400 people who did not have valid addresses on file.
If you have not received a letter, contact the Education Department to ensure they have your correct address. Show the letter to your employers as evidence that your wages should not be reduced.
Unfortunately, the collection reprieve only applies to student loans held by the federal government. People in default on commercially held bank-based federal loans could still have a portion of their paycheck, disability income or entire tax refund seized by the government.