Student Loans and Coronavirus: What You Need to Know

Student Loans and Coronavirus: What You Need to Know

Federal student loan payments are being paused for 6 months, thanks to the new $2 trillion Coronavirus stimulus bill. However, the question is whether it’s a good idea or not.

There are several benefits provided by the CARES Act that was signed by President Donald Trump to loan borrowers through September 30, 2020. It includes:

    •    Federal student loan payments suspension

    •    Removal of federal student loan interest

    •    Removal of student loan debt collection from those in default

There are many questions surrounding these very new benefits such as what Coronavirus means for your student loans whether student loan forgiveness is included in the new stimulus legislation. You can get a helpful guide to contact your federal student loan servicer if you want to check in with them. On that note, many websites of student loan servicers and the website of the U.S Department of Education may not have been updated to show this brand new information and student loan benefits. Let’s say you are pursuing public service loan forgiveness, and during this period, decides to pause payments, your non-payment will “count” into the required 120 payments per month. So, if you find information that is conflicting, there’s no need to worry because the incorrect information will be corrected on these websites soon.

Do you have to pay your federal student loans?

The question on how to pay student loans during the Coronavirus crisis is on everyone’s mind. Ways of lowering their student loan payments are being searched for by borrowers. Not paying federal student loans through September 30, 2020, is one option - this is allowed under the CARES Act. Now you might be wondering, why you would want to stop making payments on your federal student loans. Saving money during this public health emergency is the number one reason. If you don’t pay your federal student loans for six months, and you happen to lose your job or are facing financial struggles, you still have some money to finance yourself.  There are a lot of borrowers who are still working who are wondering how they can receive paid sick leave as a result of Coronavirus. Knowing whether you qualify for paid sick leave or not is important to know as it may provide additional financial resources during this time.

If you are, on the other hand, unable or proactively decide to not pay your federal student loans within this period, there are a couple of things you should know. First, interest will not be charged to you because your interest rate is 0%. Therefore, no new interest will accrue on the balance of your federal student loan. Second, late fees or penalties for non-payment will no longer be charged. Third, keep in mind that the federal government, during this period, is not paying your federal student loans. You will still have to pay your same student loan balance before the suspension of payments when this “grace” period ends. It’s best if you consider this period as an optional pause, not something that is mandatory.

Will student loans interest rates drop?

The Federal Funds Rate has been cut by the Federal Reserve Board to near zero. Short-term Treasury Bills interest rates have even gone negative. The interest rates on federal and private student loans will be affected by this.

New federal education loan interest rates change every 1st of July according to the last 10-year Treasury Note auction in May. Interest rates on federal loans have a high chance of dropping by at least 2 percentage points compared with last year based on the results of the most recent auction.

Old Federal student loans borrowers can’t finance them again into new federal student loans to benefit from the new lower interest rates.

Refinancing federal student loans into a private student loan can be done by borrowers, but the superior benefits of federal student loans will disappear, including the payment pause, interest waiver, economic hardship deferments, deferments on unemployment, longer forbearances, discharges on death and disability, and repayment that is income-driven and loan forgiveness. (Borrowers are required by some private student loans to have already graduated or been close to graduation before student loans can be refinanced.)

Refinancing is allowed to borrowers of fixed-rate private student loans and can turn them into new fixed-rate private student loans at an interest rate that is lower. Prepayment penalties on student loans do not exist. The new interest rates on private student loans may take 1-3 months to fully phase-in.

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