Federal education loans held by the U.S. Department of Education are eligible for an automatic payment pause and interest relief, which has been extended through December 31, 2020. Will the payment pause be t extended again? What happens to student loans when the payment break ends?
What is suspension of payment and exemption from interest?
President Trump announced a 60-day payment break and interest relief for certain federal student loans on March 13, 2020.
The CARES Act, which was signed into law on March 27, 2020, automatically suspends repayment and sets the interest rate at zero on eligible loans through September 30, 2020.
President Trump signed an executive order on August 8, 2020, directing Secretary DeVos to extend the payment pause and interest waiver until December 31, 2020.
Which federal loans are eligible for the suspension of payment and the waiver of interest?
Only loans held by the US Department of Education are eligible. This includes the following loans:
- All federal student loans under the Direct Loans Program
- Federal loans made under the FFEL program in 2008-09 and 2009-10 under the Continuing Access to Student Loans Act (ECASLA) whose title was transferred to the United States Department of Education
- Perkins federal loans that were awarded by the college to the US Department of Education
FFEL program loans held by businesses and Federal Perkins loans held by colleges are not eligible for payment pause and interest relief. Private student loans and private parent loans are not eligible.
Will the suspension of payments and the exemption from interest be extended again?
When President Trump announced the extension of the suspension of payments and interest relief until December 31, 2020, he said he could extend it further. The signing statement was “Today I am extending this policy through the end of the year, and we will extend it further than that, most likely just after December 1.”
However, the executive order itself didn’t mention anything about new extensions, nor did the press release from the US Department of Education.
The Heroes Act, which was introduced in the House on May 12, 2020 and passed by the House on March 15, 2020, extends the payment pause and interest relief until September 30, 2021. This legislation demonstrates support bipartisan for an extension of the payment break. and waiver of interest.
However, the Heroes Act is stalled in the Senate and it’s unclear if an extension to the payment break will be enacted during the lame duck.
What happens if the payment break is not extended?
Millions of borrowers could face financial hardship if the payment pause and interest relief are not extended.
If the payment pause and interest relief are not extended, loan servicers will send letters and other communications to borrowers to let them know that repayment will resume on January 1, 2021.
Borrowers who signed up for AutoPay, where monthly loan payments are automatically transferred from their bank account to the lender, will likely need to sign up again. After all, the lender will need confirmation that the borrower’s bank account information is still valid.
If a borrower is unemployed or has taken a pay cut, they may not be able to start repaying their student loan. Borrowers who recently graduated or dropped out of college are more likely to have been affected.
There are a few options to continue suspending the refund after the payment pause ends. These include the postponement of unemployment, the postponement of economic hardship and abstentions. Each of these options is limited to three years.
The federal government pays interest on subsidized loans during a deferral but not during a forbearance. Interest on unsubsidized loans remains the responsibility of the borrower during deferral and forbearance. If interest is not paid as it accrues, it is added to the loan balance at the end of the deferment or forbearance period.
Borrowers who are struggling to repay their federal student loans can also switch to an income-based repayment plan, which bases the monthly payment on a percentage of the borrower’s income, as opposed to the amount they owe. If the borrower’s income is below 150% of the poverty line, his monthly loan payment is zero.
The federal government pays accrued but unpaid interest on subsidized loans during the first three years of the IBR, PAYE, and REPAYE repayment plans, and half of accrued but unpaid interest on unsubsidized loans. For the remainder of the repayment term, the federal government pays half of the accrued but unpaid interest on all federal student loans in the REPAYE repayment plan.