The latest extension on the federal student loan payment and interest pause was undoubtedly a win for borrowers, but new rules are causing some confusion.

The big question for many borrowers should have an easy answer. When do I have to make payments again?

Sadly, there isn’t a simple answer. Numerous complicating factors are at play: The pause might end on June 30th. It might end before that date due to a newly-filed lawsuit.

When the pause ends, payments don’t actually begin. There could be another extension.

If you are a borrower trying to do some financial planning, this confusion complicates matters.

The Supreme Court Will Decide the Restart Date

After numerous payment pause extensions from the Biden and Trump administrations, we now find ourselves in a situation where the Supreme Court will decide when payments resume… kind of.

When the courts held up Biden’s One-Time Forgiveness program, the administration extended the payment and interest pause. They wanted borrowers to have certainty on the forgiveness program before the bills came due.

Previous extensions had a specific end date. This time, the payment pause ends when the Supreme Court rules on the one-time forgiveness plan or on June 30th… whichever comes first.

The Timing of the Supreme Court’s Ruling

We know oral arguments in the one-time forgiveness case will happen on February 28th.

Unfortunately, this nugget of information doesn’t tell us when the Supreme Court will issue its ruling. After the hearing, the justices will discuss the case and vote on the decision. At that point, justices will be selected to draft majority and, if necessary, minority opinions. This process can take months to complete.

Based on prior timelines from other court sessions, we can expect a decision from the Supreme Court by late June. The Biden administration selecting June 30th does not appear to be a coincidence.

It is certainly possible that the court expedites a ruling due to the case’s significance. However, the justices move at their own pace, and all cases that reach the Supreme Court tend to be significant.

Sherpa Tip: Don’t assume the outcome of the student loan forgiveness case. Many borrowers fear the Biden administration will lose in front of a right-leaning Supreme Court.

However, the significance of this case goes far beyond student loans. At the core of the case is the question of who is allowed to bring a lawsuit against the government. Ruling against the Biden administration could open the door for many new lawsuits, which is something that will likely concern the Supreme Court.

The SoFi Lawsuit and Restart Timing

Student loan refinance lender SoFi recently filed a lawsuit with the goal of ending the payment and interest pause.

The timing of the SoFi lawsuit is curious for many different reasons, but from the borrower perspective, it appears unlikely to have an immediate impact. Litigation is notoriously slow, and with the pause scheduled to end in just a few months, it seems unlikely that the lawsuit will cause any significant changes.

However, there is no way to be certain when it comes to predicting what might happen in a lawsuit. A judge could issue a surprise order mandating an immediate restart to payment.

Sherpa Thought: If I had to guess, I’d say SoFi’s primary motivation behind the lawsuit is to prevent another extension. The timing of the lawsuit makes it hard for SoFi to impact the current schedule for the restart, but the lawsuit could block a future extension.

A Two-Month Warning for Borrowers and Servicers

The end of the student loan payment pause and the date payments resume are different dates. Payments will resume a full two months after the pause ends.

On the surface, this plan sounds silly. If borrowers are not required to make payments, then payments are still paused.

The logical gymnastics are necessary in this case because the government has granted so many extensions. In fact, two of the previous extensions were called “final” extensions. They don’t have much credibility when drawing a line in the sand.

By putting a two-month gap in between the pause ending and payments starting, borrowers and servicers should get plenty of notice that the Covid relief is actually ending.

September 1st is the Best Guess for Payments to Resume

Based on their track record, the Supreme Court will probably rule on forgiveness in mid-to-late June. Even if they haven’t ruled, the pause is scheduled to end on June 30th.

If we jump ahead two months from our Supreme Court ruling projection, we are at August 30th.

However, it is worth noting that all borrowers won’t have payments due on the same day. Our payment deadlines are staggered throughout the month. This policy will continue in the restart. Thus, if your monthly payment was due on the 10th, your first payment deadline will likely be September 10th.

It’s worth noting that September 1st is a best guess and nothing more. If the Supreme Court issues a ruling on June 15th, borrowers will have bills due between August 15th and September 15th, depending on their billing cycle.

If the Supreme Court decides to expedite things, they may issue their judgment in April or May. In that case, payments will resume significantly earlier.

The Odds of Another Extension

After seeing the Biden administration issue multiple “final” extensions that were not final, I’m hesitant to say it won’t happen again.

That said, I’d be astonished if there was another. The SoFi lawsuit may erase Biden’s ability to extend the pause any further.

The timing of the restart is a political calculation more than anything else. If another extension is granted, it moves the restart closer to the 2024 election cycle. Biden and the Democrats don’t want voters headed to the polls angry about the repayment restart. If they restart things by September 2023, voters will likely have something more recent to be mad about.

As a federal student loan borrower, I expect my budget to feel tighter in September.

Steps to Take Right Now

A continued reprieve from student loan payments is excellent, but borrowers cannot afford to do nothing during this time.

Here are a few actions that should happen long before the restart:

• Investigate the IDR Count Update – Many borrowers will move significantly closer to loan forgiveness due to a one-time update of IDR payments. However, some borrowers need to act before the May deadline.
• Ask your servicer questions now – Calling your loan servicer is rarely a pleasant experience, but things will be horrible when bills get mailed out during the restart. Resolving repayment plan and forgiveness questions today will save you a ton of time in the future.
• Update your contact info – Have you moved in the last three years? Make sure bills and notices are sent to your current address. Servicers have zero sympathy for borrowers who were unaware of a bill due date. Updating contact info might seem like you are doing your servicer a favor, but in reality, you are protecting yourself.

The post When Will Student Loan Repayment Actually Start? appeared first on The Student Loan Sherpa.

This relief includes payments that were made by an automatic direct deposit and by manual withdrawal. Borrowers who have had wages garnished are also eligible for a refund.

All borrowers should check to see if they can qualify for a refund, including those that paid extra in an attempt to pay down their debt. If you are eligible for a refund, it is usually a good idea to request a refund on all payments.

Covid-19 Refund Basics

As of March 13, 2020, the Department of Education suspended payments and interest on all federally held student loans.

The interest and payment freeze is set to expire at some point in 2023, but the exact timing will depend upon when the Supreme Court rules on the one-time forgiveness plan.

Borrowers have the right to a refund on all payments made after March 13, 2020.

What About Student Loan Forgiveness? Even though the Department of Education has suspended payments and interest, borrowers can continue to work towards student loan forgiveness. This includes Public Service Loan Forgiveness and Income-Driven Repayment Forgiveness. Borrowers do not need to make payments to have the Covid-19 relief time count towards forgiveness.

Refund Procedure

In most cases, getting a student loan payment refund requires a phone call to your loan servicer.

Before calling to request a refund, borrowers should log in to their loan servicer account to pull up their payment history. Borrowers will need this information to verify that they receive a refund for all eligible payments.

To qualify for a refund, borrowers do not need to show a hardship or that the Covid-19 pandemic has impacted them. The only requirement is that they request a refund.

Why Should All Borrowers Request a Refund?

During the pandemic, many borrowers have continued to make payments on their student loans. These borrowers continued to make payments to take advantage of the 0% interest and reduce their balance.

The borrowers making extra payments should be applauded for their initiative, but there is a better way to manage federal debt during this time.

Rather than making payments, borrowers should set aside money for their federal student loans in a high-yield savings account. After the Covid-19 relief, borrowers can make a large student loan payment using the money set aside.

The minor inconvenience of asking for a refund is nothing compared to the many advantages.

The Big Exception: Before I spell out the reasons for asking for a refund, I should first share the one exception to the rule.

Don’t ask for a refund if you don’t trust yourself to handle the money responsibly. For some people, a large chunk of money just sitting in an account is too much temptation. If you recognize this about yourself, don’t request a refund unless you absolutely need the money.

The Advantages of Getting a Covid-19 Refund on Federal Student Loan Payments

Student Loan Forgiveness – There is growing support for some form of student loan forgiveness for borrowers. One proposal calls for the forgiveness of $10,000 worth of federal loans for all borrowers. Another leading proposal would wipe away $50,000 worth of debt. Even though both proposals are highly unlikely to become a reality, it is possible. If the improbable happens, failing to get a timely refund could cause borrowers to miss out.

Earn Extra Interest – The battle against student debt is a fight against interest. Each day student loans generate more interest. The payment and interest freeze is the one time that borrowers can afford to wait to make payments. Rather than paying down a student loan balance, the money can sit in a high-yield savings account working for the borrower. With some accounts now paying over 4% interest, this could be a valuable move for many borrowers.

Flexibility in an Emergency – This is the biggest and most important reason to get a refund on previous payments. The Covid-19 pandemic has created a lot of economic uncertainty. Some people are getting sick and unable to earn a living, while others keep their job but face massive medical bills. Those that stay healthy may see their jobs eliminated. A larger emergency fund is a valuable resource. When the interest freeze eventually ends, borrowers can reexamine their plan. For now, there is no harm in setting aside student loan payments for a rainy day.

Waiting for Automatic Refunds

Some borrowers may potentially qualify for automatic refunds.

Should the Biden administration prevail in the Supreme Court on the one-time forgiveness case, some borrowers would receive automatic refunds.

However, waiting for an automatic refund isn’t advisable for several different reasons.

For starters, the Biden administration could lose its case. Second, the automated refund rules are somewhat complicated, and not all payments will necessarily be refunded. Most importantly, if you paid off your balance in full, the automated refund wouldn’t happen. However, if you request a refund, you can still qualify for the one-time forgiveness.

Refund Request Timeline

Servicers are currently telling borrowers that it will take about six to twelve weeks to process refund requests.

This extended timeline presents a challenge for borrowers. You will have to be patient while servicers process the request, but you can’t forget about the request either.

The best practice is probably to leave a reminder in your calendar to follow up on the refund request.

Frequently Asked Questions

The post Covid-19 Relief: Refunds on Federal Student Loan Payments appeared first on The Student Loan Sherpa.

The Department of Education’s approach seems fair, logical, and straightforward.

Granted, calling your loan servicer may still be a nightmare, but many borrowers won’t need help from their servicer as repayment begins.

Sherpa Tip: You may have heard about a new Income-Driven Repayment plan. The new plan is likely to lower monthly payments for most IDR borrowers.

However, the new plan is not yet available. Waiting for it to become available is not recommended at this time.

Determining Monthly Payments for Income-Driven Borrowers

Most borrowers on IDR plans like IBR, PAYE and REPAYE know that their annual certification is only good for one year.

In a pleasant surprise, the Department of Education is not requiring every borrower to recertify before repayment restarts. Instead, borrowers have the option of resuming where they left off.

For example, suppose you last certified your employment in August of 2019. The freeze started in March 2020. At that point, your certification was about seven months old. When repayment resumes, your old certification is still valid for the next five months.

Finally, loan servicers are responsible for notifying borrowers when they are approaching an IDR certification deadline.

The Payment Pause and IDR Certification: When the government paused payments and interest on federal student loans, they also paused deadlines to certify income.

Lowering Monthly Payments Before the Restart

Borrowers have the option of sticking with their old monthly payments. However, there are opportunities to restart repayment with lower monthly bills.

The standard method for calculating IDR payments is to use your most recent tax return. Because the payment and interest pause dates back to March 2020, most IDR payments are currently based upon 2018 or 2019 federal tax returns when repayment resumes.

If your income has dropped since your last certification, you have the option of recalculating payments before your next deadline. Based upon where we are on the calendar, this gives borrowers a wide range of options.

Use your 2018/2019 Federal Tax Return – A lot has changed since many borrowers last filed an income certification. If your income was smaller pre-pandemic, it means a smaller monthly bill for the restart.

Use your 2022 Federal Tax Return – If 2022 marks a lower point in your income, filing taxes quickly and then certifying as soon as possible may be the best route.

Use a recent paystub – If both the 2018/2019 return on file and 2022 tax returns show more income than what you currently earn, you can use a recent paystub as an alternative documentation of income.

Unemployed Option – If you don’t currently have any taxable income, you can submit a recertification and qualify for $0 per month payments for the next year.

IDR Certification Strategy

As you get ready for the restart, I have a couple of tips for borrowers to use.

Use the certification method that results in the lowest monthly payment. Figuring out how to get the lowest payment isn’t always easy. Fortunately, the Department of Education’s Loan Simulator does an excellent job of helping borrowers estimate monthly payments on the various repayment plans.

The Repayment Restart and Student Loan Forgiveness

Even though the government suspended interest and paused payments, the forgiveness clock kept ticking.

Borrowers working towards Public Service Loan Forgiveness can still earn credit for the months they worked at an eligible employer during the Covid-19 payment freeze.

Additionally, the borrowers working towards the 20 or 25 year IDR forgiveness will also receive credit for the nearly two years that payments were suspended.

Automated Payments and the Repayment Restart

Many borrowers have their loan servicer auto-debit their monthly payments.

If you don’t want auto-debits to resume, the best approach is to log in to your loan servicer account to terminate any auto-debits.

According to the Department of Education, loan servicers will use the following rules for the restart:

• If you signed up for auto-debit before March 13, 2020: Your loan servicer should contact you to see if you want to continue with auto-debits. The loan servicer should end the auto-debt if you don’t respond.

• If you signed up for auto-debit after March 13, 2020: Automated payments will resume automatically.

The auto-debit rules are a bit more complicated for borrowers with Perkins loans and borrowers with loans in default.

Additional Covid-19 Relief for Student Loan Borrowers

Unfortunately, once the payment and interest pause officially ends on August 30th, 2023, the Covid-19 related assistance is over for student loan borrowers.

However, those facing hardships still have available resources. These resources include deferments, forbearances, and income-driven repayment plans.

The To-Do List for the Repayment Restart

• Update contact information with your loan servicer. Some of the servicers are changing and you don’t want to miss any important notifications.
• Select the best repayment plan for your situation. The best resource for this task is the Department of Education’s Loan Simulator.
• Update your progress towards PSLF. Any borrower considering PSLF should use the PSLF help tool to file the necessary forms to document their progress. (Also, check out the one-time IDR update if you have previous eligibility issues.)
• Double-check auto-debits and bill pay. If you want payments made automatically, make sure they are set up for the right amount.
• Call your servicer with questions as soon as possible. The longer you wait to call, the longer the lines will be. The late August and early September hold times will be awful.

The post Income-Driven Repayment Plans and the Federal Student Loan Restart appeared first on The Student Loan Sherpa.

The borrowers and future students who apply these lessons to their planning will be better situated to manage their debt — no matter what the future holds.

Federal Loans Are Much Better Than Private Loans

For many years this site has advocated maxing out federal options before considering a private loan. Even though federal loans charge an origination fee and occasionally have higher interest rates, they are preferable.

The primary benefit to federal student loans is the borrower protections available. The best-known protection is likely the forgiveness programs capable of wiping away entire balances. Another critical protection is the option to make payments based upon what you can afford rather than what you owe. Income-driven repayment plans help ensure that borrowers never have to choose between food on the table and student loan bills. In some cases, this means $0 monthly payments for borrowers.

Sometimes people don’t graduate. Other times people graduate, but they don’t find a job. Sometimes people find a job, but they lose it due to a global pandemic. Covid-19 is a reminder that unexpected events happen. When the unexpected happens, federal loans provide far more flexibility than private loans.

Students about to start school or in school should take steps to minimize private loan borrowing. Borrowers in repayment may want to consider paying off their private loans first, even if the interest rate is higher on the federal debt.

Can I Convert Private Loans into a Federal Loan? Options are limited for borrowers in repayment, but it is possible to gradually convert private debt into federal debt. Things are a bit easier for borrowers still in school.

The Federal Government And The President Can Make Dramatic Changes To Federal Loans

President Trump set interest rates on federally-held student loans to 0% at the start of the pandemic. Congress passed legislation extending the break. President Biden continued the practice until at least October of 2021.

In the history of federal student loans, there wasn’t any precedent for this move. However, the maneuver received bipartisan support and provided an essential lifeline to borrowers.

The lesson from this change is that the President and Congress can have a considerable influence on federal student loans. This potentially includes the ability to cancel out large amounts of debt for all federal borrowers. While this variable complicates repayment planning, it is an important consideration moving forward. With interest rates on federal loans still at 0%, many borrowers are choosing to focus on debts other than their federal loans.

Beyond the possibility of cancelation, the big variable is that terms may change. Private loans have fixed contracts, and lenders rarely deviate from the rules of the loan. Federal loan rules may change in favor of the borrowers. A new repayment plan may come into existence, or tax incentives might be created. Nothing is inevitable, but borrowers should closely follow any developments as they happen.

Colleges Are Ruthless

When the pandemic first started, many schools quickly ended in-person learning. Buildings were closed, and the educational experience looked a lot different. What students expected when they paid for school and what they got looked very different.

Despite the massive changes and considerable endowments available, the vast majority of schools offered no refunds on tuition. Many families brought lawsuits, but the odds of success on those lawsuits look slim.

The lesson for students: when it comes to financial matters, don’t count on your school for an act of goodwill.

Expecting The Unexpected

Like so many aspects of life, Covid-19 changed higher education and student loans.

The students and borrowers who maintained flexibility were best positioned to handle the major changes.

Going forward, there are three things borrowers can do to maintain flexibility:

1. Knock out student debt when possible.
2. Stick with federal student loans.
3. Have an emergency fund in place.

The post Student Loan Lessons from the Covid-19 Pandemic appeared first on The Student Loan Sherpa.

The end of the federal student loan interest and payment freeze will present huge challenges to borrowers and loan servicers.

Fortunately, borrowers can get proactive to avoid many of the predictable headaches.

Dark Clouds on the Horizon: Federal Servicing when Repayment Restarts

At the conclusion of the payment and interest freeze, approximately 30 million student loan borrowers will enter repayment simultaneously.

Long before the pandemic, there were issues with loan servicers. The government previously accused one of the largest servicers of failing to process payments, obscuring information, and borrower deception.

Once the pandemic began, and payments were suspended, servicers reduced staff.

Staff training was an issue before Covid-19. Now servicers will have to add sufficient staff to handle an unprecedented number of borrower calls, complaints, and questions.

The list of borrowers who will need immediate help is long:

• People are unemployed or underemployed due to the pandemic.
• IDR borrowers who need to recalculate their monthly payments.
• Graduates of the class of 2020 and 2021 will be starting repayment for the first time.
• Borrowers who need to update their progress towards student loan forgiveness.

Servicers are already saying they expect more calls in one month than they normally receive in a year.

Planning for Federal Student Loan Payments to Resume

The government has already extended the federal student loan interest and payment freeze several times. Planning for a moving target presents challenges to borrowers.

That being said, I’d expect the actual end of the Coronavirus relief to be clear in advance. The President or Secretary of Education may even announce that no further extensions will be issued. This move would give borrowers and servicers time to prepare for the big restart.

Before payments resume, borrowers should consider the following:

• What repayment plan do I want?
• If I’m an IDR borrower, have I recertified my income?
• Do I need to file an Employer Certification Form for Public Service Loan Forgiveness?
• Am I ready to resume making payments, or will I need help?

Answering these questions in advance is ideal. Borrowers can avoid long wait times and get help from loan servicers before they get overwhelmed and start rushing things.

Additionally, the crowd of callers and borrowers needing customer support may make it hard to meet deadlines. The IDR borrowers will want to pay special attention to their yearly recertification deadlines. A delay could potentially be very expensive.

To the extent possible, borrowers should research and investigate all questions before the payment freeze ends.

Things to Watch Once the Interest Freeze and Payment Suspension Ends

Even if borrowers do everything right before the freeze ends, there may still be issues.

Auto-debits may have been canceled at the beginning of the interest freeze. Will they resume automatically, or do borrowers need to take specific steps?

Are the federal student loan servicers pulling money out of the correct bank account and applying payments correctly? As borrowers, we often take these simple steps for granted. However, given the unprecedented number of borrowers starting repayment at the same time, the odds of a mistake are increased.

Tools for Planning

• Department of Education Repayment Simulator – The repayment simulator helps borrowers compare repayment plans and estimate monthly payments.
• PSLF Help Tool – Borrowers working towards PSLF can use the help tool to ensure they file the necessary forms.
• StudentAid.gov IDR Request Form – This form is required for signing up for an income-driven repayment plan. Borrowers can also use it to change plans, recalculate their payments after a pay cut, or do a yearly income-certification.

The post Expect a Federal Student Loan Servicing Mess When Repayment Restarts appeared first on The Student Loan Sherpa.

The federal interest and payment freeze only applies to “federally held” student loans. FFEL loans are federal student loans but not federally held, so many borrowers are still charged interest. Fortunately, federal direct consolidation could fix this issue. Unfortunately, federal direct consolidation may be a mistake for some FFEL borrowers.

Today we will cover how to get federal loans eligible for the 0% interest rate. I will also explain why the interest break might still be a mistake for some borrowers.

Converting FFEL Student Loans into Federal Direct Loans

Federal Family Education Loan (FFEL) Program Student Loans are federal student loans. However, a third-party usually owns the debt. Hence the distinction between federally held and federal student loans.

Federal Direct Consolidation transforms FFEL debt into federal direct debt. During the consolidation, the federal government pays off the FFEL loans, and the debt is replaced with a new federal direct loan.

Prior to the student loan interest freeze, borrowers used this process to gain eligibility for the Public Service Loan Forgiveness Program. Today, the same steps mean a payment forbearance and 0% interest.

The Federal Direct Consolidation Process

The federal direct consolidation process is provided exclusively by the Department of Education.

The application is fairly simple. The Department of Education estimates that most borrowers complete the process in about 30 minutes.

Borrowers can expect the following basic steps:

• Completion of the initial application. This is the part that takes half an hour.
• The Department of Education calculates and makes arrangements for the final payoff of the original loans. Borrowers don’t need to take any action during this step.
• Funds from a new federal direct consolidation loan are used to pay off the old loans. This is the step that eliminates the FFEL loans and creates a new federally held loan.
• Borrowers start repayment on the new federal direct consolidation loan. As a federally held loan, borrowers will qualify for the Coronavirus deferment and 0% interest rate.

Important Note: While this process sounds simple, it has major consequences. Paying 0% interest until October is a great perk, but consolidation may be a huge mistake. Borrowers should understand the consequences of consolidation before starting the process.

The Validity of Direct Consolidation to Qualify for 0% Interest

I usually don’t like to inject myself into these articles.

However, this is one topic that readers may view with a bit of skepticism. I know I would.

I can say that I personally borrowed FFEL loans when I attended law school. Long before the Covid-19 pandemic, these loans were consolidated into a federal direct consolidation loan. My loans qualified for the payment and interest freeze.

The Department of Education has stated the following on consolidation and 0% interest:

When is Federal Direct Consolidation a Mistake?

Borrowers should understand that federal direct consolidation isn’t a tiny loophole to exploit for 0% interest.

Consolidation eliminates old loans and creates a new loan. The consequences may devastate some borrowers.

In a worst-case scenario, a borrower may be approaching qualifying for student loan forgiveness on an income-driven repayment plan. By consolidating, this borrower starts the forgiveness process at the beginning. In this instance, a temporary break from interest would not justify wasting years of payments that would have counted towards forgiveness.

Borrowers must weigh the benefit of the temporary relief against the progress that consolidation erases.

Raising the stakes even higher is the fact that there is no way to undo a loan consolidation. Once the process is complete, there is no going back.

Some borrowers may have also accumulated significant uncapitalized interest on their loans. The consolidation process is one of the ways that federal interest capitalizes.

Borrowers on the fence should carefully discuss their options with their loan servicer. Reviewing the Student Loan Sherpa Federal Consolidation Guide may help prepare for this conversation.

Next Steps:

• Talk to your servicer about federal direct consolidation and the consequences for your loans.
• Start the Federal Direct Consolidation Application.

The post Get 0% Interest on FFEL Student Loans During Covid-19 Forbearance appeared first on The Student Loan Sherpa.

As part of the economic relief during Covid-19, student loan payments and interest have been paused for most federal student loans.

The break from student loan payments was a welcome surprise to many borrowers. However, it has also caused some confusion. How does this impact borrowers chasing Public Service Loan Forgiveness? Will this time count towards PSLF? Does it count towards the 20 or 25-year Income-Driven forgiveness plans? Is there anything borrowers need to do?

Because Covid-19 was not anticipated when the student loan contracts were drafted, and when the PSLF law was passed, there isn’t an existing procedure in place. Fortunately, there are a few simple steps that borrowers can take to help ensure that time on a virus deferment can still count towards student loan forgiveness.

The CARES Act on Student Loan Forgiveness

One of the great features of the CARES Act is that it explicitly said that during the months that payments were suspended, borrowers would still get credit towards student loan forgiveness programs. (The applicable text from the legislation is available here.)

In response to the new law, the Department of Education created a page dedicated to answering questions about the Coronavirus relief program. The requirements for the time to count towards student loan forgiveness are pretty clear:

In short, under the CARES Act, borrowers should not need to make extra payments or take any additional steps to get the time to count towards student loan forgiveness. However, the CARES Act student loan relief ended on September 30th, 2020.

Trump and Biden’s Student Loan Executive Orders

The confusing part of the initial executive orders on student loans was that they don’t make reference to student loan forgiveness. Without specific language about the payment pause time counting for programs like PSLF and income-driven forgiveness, borrowers were left in limbo.

Eventually, The Department of Education issued a press release explaining that the payment and interest rate freeze period covered by the executive order WILL COUNT for Public Service Loan Forgiveness and Income-Driven Forgiveness.

Will Making Extra Payments Help?

Some readers have questioned whether or not making typical payments might help in their quest for student loan forgiveness.

While there was some initial confusion as to whether or not making extra payments would help, the clarity from the Department of Education means that borrowers won’t need to make payments for the time to count for forgiveness.

Steps for Borrowers to Take to Count Time Towards the Forgiveness Clock

Under the law, there are not any extra steps that borrowers need to take to get the Covid-19 relief time to count towards forgiveness.

Sadly, as most student loan borrowers know, loan servicers are prone to making mistakes. The payment and interest freeze is a new process for all loan servicers, so the possibility of a glitch certainly exists.

Even though forgiveness could be years or decades away for some borrowers, some steps can be taken now to avoid delaying student loan forgiveness.

1. Get an updated count on progress towards forgiveness.
   • Public Service Loan Forgiveness candidates can submit an employer certification form right away.
   • Borrowers working towards forgiveness on an Income-Driven Repayment plan such as Income-Based Repayment (IBR), Pay As You Earn (PAYE) or Revised Pay As You Earn (REPAYE) can ask their servicer for an updated tally of payments as of March 2020.
2. Get an updated progress report after the payment freeze ends.
   • We don’t know how long Covid-19 or the payment freeze will last, but when it eventually ends, get another updated tally.
   • If there is an issue, it will be easier to address when it is identified right away.
   • Servicer statements on progress could be very useful if later updates have a mistake.
3. Keep a timeline of all eligible payments.
   • If borrowers don’t keep detailed records of their progress, they won’t know whether or not their servicer made a mistake.
   • It might be hard to prove a payment was made many years later, but setting aside records as you go will make things easier.

Taking these extra steps may not be required, but when operating in a system where mistakes often happen, having proof of progress is incredibly valuable. Considering how much debt many borrowers stand to have forgiven, it could be time very well spent.

The post The Impact of the Federal Interest and Payment Freeze on Loan Forgiveness (UPDATED) appeared first on The Student Loan Sherpa.

Borrowers may have the chance to take advantage of lower interest rates, but some of these strategies come with additional risks.

Most planners should be able to direct their clients to options that take advantage of interest savings opportunities. These options should be available to nearly all federal borrowers and most private loan borrowers.

Federal Interest Rates at 0% for Most

The CARES Act specifies that most federal student loan borrowers will have 0% interest until September 30, 2021. During this time, borrowers are not required to make payments. However, some borrowers are choosing to make payments to put a dent in their principal balance.

Borrowers are not required to take any steps to enroll in the 0% interest rate or payment deferment. However, removing automated payments may be necessary.

There has been some conversation about extending the payment freeze into 2022. Due to the politics of the situation, there is a good chance that the 0% interest rate will be extended.

Getting Conservative on Student Loans

Like most other aspects of financial planning, many clients will want to get conservative during the financial and economic turmoil.

While some borrowers are using the 0% federal interest rates as an opportunity to reduce their balance, a better approach may be to set aside the extra payments in a high-yield savings account. The interest generated is of some value, but the real benefit is having the money available in the event of a job loss or furlough. The funds earmarked for student loan payments can serve as an added financial reserve during the Coronavirus crisis.

Help from Private Lenders

Some lenders have contracts that specifically provide relief for borrowers impacted by a declared national emergency. As of March 13, 2020 Coronavirus has been a declared national emergency.

The loan contracts that do have national emergency protections will usually provide borrowers with extended deferments or forbearances. Even though interest will continue to accrue in most cases, the national emergency provisions may provide borrowers with an opportunity to build up their emergency fund or attend to essential matters such as food, housing, and utilities.

Other lenders also have specialty programs for borrowers who have fallen behind, such as the Navient Rate Reduction Program. These programs are not advertised, and enrollment can be a challenge. However, in some cases, borrowers may be able to secure a temporary lower interest rate while they deal with a financial hardship.

Refinancing Requires Little Analysis

Traditionally, the decision to refinance federal student loans has been somewhat complicated. Planners needed to balance the major benefit of refinancing, lower interest rates, against the federal perks that the borrower would be losing. These federal perks include income-driven repayment plans and student loan forgiveness.

During Covid-19, the analysis is far more straightforward. Don’t refinance federal student loans. No refinance lender will be able to match the 0% rate offered by the federal government. Additionally, federal protections are especially valuable when there is a risk of unemployment and prolonged joblessness.

However, Refinancing should be seriously considered by borrowers who have high-interest private loans. Refinancing these loans at a lower interest rate can help in two ways. First, securing a lower interest rate means less spending on interest over the life of the loan. Second, opting for a longer repayment plan provides borrowers more flexibility during an uncertain time.

At present, rates are near historic lows, so borrowers will likely benefit from opting for a fixed-rate loan.

The complicating factor for refinancing is the fact that some lenders have struggled with liquidity at times during the pandemic. For this reason, borrowers should be encouraged to check rates with several different lenders. An applicant with a strong credit profile may be offered an abysmal rate due to limited funding for the lender.

Final Thought: Facing the Hard Questions

The many changes caused by Covid-19 may present clients with unique challenges and unique opportunities.

If you have a client with a challenging decision, feel free to send me an email to chat. While I don’t take individual clients, I’m always happy to answer questions via email. These conversations can be very helpful to readers, and they often provide ideas for new and useful content on this site.

The post Financial Planners: Student Loan Guidance for Your Clients During Covid-19 appeared first on The Student Loan Sherpa.

The borrowers making extra payments see it as an opportunity to knock down the principal balance and get the debt eliminated much sooner than initially planned.

I think that this is a reasonable strategy that will lead to positive outcomes for many borrowers. However, it isn’t the best strategy.

A better approach would take full advantage of the 0% interest rate and provide borrowers more flexibility. A better approach would leave borrowers more prepared for financial hardships.

The Plan to Take Advantage of 0% Federal Loan Interest

Instead of making payments, federal borrowers with a 0% interest rate should set aside cash in a high-yield savings account. The interest rates on these accounts are not huge, but most should be able to earn some money.

Once the 0% interest period ends, borrowers can empty their high-yield savings account and apply the proceeds to their student loans.

Under normal circumstances, this approach is a bad idea. Student loan interest rates will almost certainly be higher than the best available savings rate. Zero percent interest provides a rare opportunity to earn some money before making student loan payments.

Maximizing Flexibility in Uncertain Times

This strategy is about far more than just earning a few extra bucks on the interest.

Surging unemployment numbers and a bleak economic outlook should worry many borrowers. One of the significant dangers of aggressively repaying student loans is that the large payments are gone forever. It is the reason borrowers are advised to build up an emergency fund before getting serious about debt elimination.

By putting monthly payments in a savings account, borrowers retain control over the money. Those that lose their job or face huge unexpected costs, such as medical bills, will be glad they held on to the cash.

Someone who loses a job can get $0 payments as long as they are unemployed. What they cannot have is a refund on payments they already made.

In the face of so many unknowns, small steps to increase financial flexibility can pay off handsomely.

Best of all, setting aside the extra payments during the Covid-19 interest freeze costs the borrower nothing. As the forbearance comes to an end, borrowers can use the money set aside to reduce their loan balance if necessary.

Talk of Student Loan Forgiveness

The House of Representatives has already passed legislation that would forgive up to $10,000 of student loan debt for “economically distressed” borrowers.

Though the HEROES Act stands little chance of surviving the Senate, there is no denying that there is growing support for student loan forgiveness.

Borrowers who put their federal loan payments in a savings account may be in a better position to maximize any potential forgiveness provision that becomes a reality during the rate freeze.

It is worth noting that such an event at this point is still considered highly unlikely. However, it is a conceivable possibility, and with a 0% interest rate, borrowers lose nothing by waiting a bit to see what the future may hold.

Who Should Make Extra Payments During the Covid Forbearance?

As with most student loan issues, this strategy is not one size fits all. Some borrowers will be better off sticking with the more traditional approach of making payments as planned to knock out their student loans.

Some might see the growing balance in a savings account and be tempted to use the money on something unnecessary. These borrowers may benefit from forcing themselves to make payments.

Final Thought: Get Creative

A 0% interest loan is highly unusual.

The zero-interest period may end in September, but the politicians in DC may decide that raising interest rates right before an election is a mistake.

This strange circumstance provides student loan borrowers a unique opportunity. Those that are willing to get creative and take an extra step or two may find that they do much better in the long run.

If you have already made payments, and wish you didn’t, getting a refund should be easy. Don’t be afraid to ask!

The post Expert Tip: Don’t Make Extra Payments During Covid-19 Interest Freeze appeared first on The Student Loan Sherpa.

The fast-changing economic conditions have had a significant influence on the student loan refinance process.

Federal student loan borrowers will want to take advantage of the current federal relief. However, borrowers with private loans may find excellent opportunities to refinance.

Now is a Bad Time to Mess with Federal Loans

The majority of student debt in the United States is owned by the federal government. Owing money to the federal government instead of a private lender can be beneficial in ordinary situations. During this particular financial and health crisis, this benefit is magnified for three critical reasons:

1. The standard federal protections will help many borrowers. One of the best aspects of federal student loans is the availability of income-driven repayment (IDR) plans. The IDR plans allow borrowers to make payments based upon what they can afford, rather than how much they borrowed. For borrowers with large debts or who recently lost their job, this protection is huge. It ensures that a long period of unemployment means that borrowers won’t have to spend any money on their federal student loans, and it means that there is no risk of delinquency or default for the unemployed. While there are many legitimate grips about the federal student loan system, the IDR plans are far superior to the options available from private lenders.
2. The government has frozen student loan interest rates and suspended payments indefinitely for most borrowers. The current relief is set to expire on September 30th, 2021. However, this date has previously been extended several times, and it is possible that rates will stay at 0% beyond the current expiration date.
3. More relief could be on the way. Senate Democrats have released a proposal that would suspend all student loan payments during the duration of the Covid-19 outbreak and cancel $10,000 of debt for all federal borrowers.

Generally speaking, when borrowers refinance their federal loans with a private lender, it is to secure lower payments or get a lower interest rate. For the time being, it will be tough for any private lender to compete with the federal perks and protections offered on government loans.

Once the economy and job market return to stability, more borrowers should consider refinancing at a lower interest rate. However, given that the Secretary of the Treasury recently said we could be looking 20% unemployment rates, assuming job security over the next year might be a mistake. When job security is a concern, borrowers should stick with federal loans.

Things are different for borrowers stuck with private student loans.

Many Private Loans Should be Refinanced Immediately

Not all borrowers can qualify to refinance their student loans, and not all borrowers are able to get a lower interest rate.

However, borrowers with a good job and a solid credit score should very seriously explore refinancing their high-interest private loans.

Procrastination on a private refinance could be expensive in the current economy.

1. Lender rates are all over the place. Covid-19 has put the economy in chaos, and student loan refinance lenders have not been immune to the effects of the virus. This site has been tracking refinance rates dating back to 2013, and this is by far the most rate movement we have ever seen in a short period. Some lenders are rapidly raising rates while others remain near record lows.
2. Interest rates may go up. Thus far, lending has not dried up. However, in a down economy, getting loans can become increasingly difficult. If this happens, student loan borrowers will see higher interest rates on refinance loans. This is because higher interest rates will be necessary to entice nervous investors to buy the loans.
3. Borrowers could lose their job. Those who are unemployed will not be able to get approved for a refinance loan. Anyone vulnerable to losing their job should seriously consider a longer repayment period to get payments as low as possible. Selecting a 20-year refinance loan doesn’t commit a borrower to taking 20 years to pay off the loan because there is no early payment penalty. However, it does give borrowers the flexibility of low minimum payments.

The current best interest rates in the 20-year loan category are with the following lenders:

Rank	Lender	Lowest Rate	Sherpa Review
1		6.08%*	Splash Financial Review
2		6.53%	ELFI Review
3		6.55%	Laurel Road Review

Some might argue that waiting for interest rates to drop due to the current economic conditions is the best approach. While that might be true in the case of a mortgage refi where the transaction can cost thousands of dollars, there is almost no harm in refinancing student loans multiple times. Savvy borrowers can lock in the best choice for their current circumstances, and then if things change for the better, opt for a new loan at a later date.

Student Loan Refinance Strategy During Covid-19

Most borrowers will want to leave their federal loans untouched. On the private loan side of the equation, locking in better terms is probably the best approach. Borrowers will also benefit only refinancing the private loans that are actually improved by a refi. In many cases, a borrower may choose not to refinance their low-interest loans and opt only to refinance the loans that have higher rates.

We have always advocated for borrowers to shop around because all lenders use different formulas for determining who they will approve and what rate they will offer. The recent economic turmoil has made predicting which lender will offer the best rate even more difficult. As a result, borrowers should plan on checking rates with at least five different refinance companies to find the best deal.

Finally, when selecting a repayment plan, borrowers should play it safe and opt for more extended repayment periods. Five-year loans have the lowest interest rates, but these loans also carry the highest monthly payments. In a recession, flexibility is critical, and having a lower minimum payment means maximum flexibility. Be sure to commit to a new loan that will be easier to maintain. Borrowers can always pay extra if they want, but there are very few ways to get lower payments if things get ugly.

Should I Refinance my Student Loan During the Coronavirus Outbreak?

While there are exceptions to every rule, the vast majority of borrowers will want to heed two simple rules when it comes to refinancing during the era of social distancing.

1. Don’t refinance federal student loans.
2. Lock in lower interest rates and/or payments with private loans if you can.

Those that are looking to refi can learn more about the process and the lenders in the market on our student loan refi page.

The post Is it a Mistake to Refinance Student Loans During the Coronavirus Pandemic? appeared first on The Student Loan Sherpa.