Nowadays, news about student loan-related issues is more challenging to understand than ever. With the 46th president’s election and continuing pandemic, there pops an update almost every day. Hence, it is not surprising that student loan borrowers feel lost due to information overload.
In accompanying the difficulties borrowers face, we created this guide to highlight the most critical points about the recent stimulus packages and debt collection suspension periods. Besides presenting, we will also explain what is in the stimulus package for student loans and what differences it brings.
Lastly, the borrowers who cannot access these benefits- the federal borrowers without direct loans and private debtors- will get familiar with their options to reduce debt obligations.
Different Stimulus Packages for Student Loans
In March, Congress approved the CARES Act, which allowed borrowers not to make payments for student loans until September end. During such forbearance periods, the borrowers make $0 payments with no interest accrued.
Later, in August, ex-president Donald Trump announced that the non-collection period would be prolonged till the end of December. In December, Education Department Secretary Betsy DeVos extended the forbearance period on student loans until January.
Different acts were also proposed throughout the period but did not get approval from Congress. For example, the Democratic House supported the HEROES Act. This act aimed to extend the forbearance period till September 2021. However, as it involved a considerable price- $3.4 trillion, Republicans did not support the idea.
Additionally, the Republican Senate supported the HEALS Act. This proposal targets cancellation of all federal repayment plans, except Revised Pay as You Earn and the Standard Repayment plan. Besides, different from the HEROES Act, the HEALS Act involved resuming the debt-collection period starting after September. Similarly, it was not approved, either.
March 2020 Stimulus Package
After the COVID-19 pandemic hit the economy, the government was obliged to make some favors for the borrowers. Otherwise, borrowers could default, which is not desired. Student loan default involves an expensive process, and debt collection becomes even more problematic. Therefore, not surprisingly, the Senate and House passed the CARES Act. We mentioned the act in the previous section, but it deserves more attention as it was worth $2.2 trillion.
The act brought the benefits almost automatically. The borrowers did not need to do much to receive government assistance. Its main element was the debt forbearance period till September end 2020. If a borrower made payments from March 13 till that period, he/she could request a refund. Besides, collection through wage garnishments or tax refunds stopped.
What about the Student Loan Forgiveness Program?
The CARES Act did not involve immediate forgiveness for student loans. However, it also did not negatively affect borrowers working for cancellation opportunities.
During this period, the borrowers are not required to repay the debt. Meanwhile, no interest accrued, and the months still counted for the federal aid programs.
For example, the Public Service Loan Forgiveness program requires 120 payments before the debtor receives the cancellation for the rest of the owed amount. Some borrowers were worried that $0 payments would stop their progress for the PSLF program, but it did not happen. The forbearance considered the PSLF payment progress. Income-Driven repayment plans also grant forgiveness after some payments. The CARES Act did not hurt the borrowers working for such debt elimination programs.
As a part of a stimulus package for student loans, employer contribution to student loan repayment was proposed. This contribution helped businesses to get a tax break-up worth a maximum of $5,250. However, it was only for some time, and the officials needed to approve it again in 2021 to make it permanent.
December 2020 Stimulus Package
In December, the government delivered an economic stimulus package. The package has many benefits for the student loan borrowers.
First, one element in the stimulus package for student loans was the employer’s ability to repay employees’ debt. The government extended this ability for five years. In general, employers can contribute to employees’ student loan payments, which involves a maximum of $5,250. Besides, this contribution is not taxable.
The government also made changes in the Pell Grant process. Its limit was increased, and the program started to cover incarcerated people. It was announced that more than $1 billion would be distributed as forgiveness to Historically Black Colleges and Universities. Besides the monetary benefits, the government also announced that it would make the FAFSA- Free Application for Federal Student Aid- process simpler. In this way, more borrowers will be eligible for the benefit.
However, unfortunately, the part of the stimulus package for student loans did not involve any change to Income-driven programs, removal of taxation on forgiveness, or extension of the non-collection period for borrowers. We will talk about these issues in the following sections.
Employer’s Contribution to Student Loan Repayment
One of the biggest changes included in the stimulus package for student loans was the extension of the employer’s contribution to the repayment process. The supporters of this change always wanted to make the assistance tax-free so that the young people have more incentives to work with certain companies. It was expected that the benefit would be extended for a year.
However, surprisingly, Congress made this benefit accessible for five more years. In this way, it communicated the idea that the employer’s assistance in repayment can be permanent.
This stimulus package for student loans did not cover private loans. In general, private borrowers could not benefit much from the government aid programs. Unfortunately, private loan borrowers do not have many options to deal with debt as the federal borrowers do. Yet, read till the end of this guide to get familiar with private loan opportunities.
Additionally, Federal Family Education Loans do not qualify for the stimulus package for student loans if commercial lenders distributed them. Currently, such loans are owed by more than 6 million debtors. In other words, at least 6 million federal loan borrowers who got the debt from commercial lenders cannot benefit from the COVID-19 relief.
How to Get Eligible in Stimulus Package for Student Loans?
Although many old federal debt types do not qualify for a stimulus package for student loans, borrowers can benefit if they consolidate. It is possible to consolidate existing loans to make them Direct Consolidated loans. In this case, the borrowers can freeze the payments and enjoy 0% interest during the forbearance period.
However, debtors should keep in mind that they can lose the points earned for Income-Based Repayment or Public Service Loan Forgiveness programs. Usually, in such forgiveness opportunities, payments made after consolidation are considered. All payments before consolidation are left out in counting the number of qualifying payments.
Implications for Defaulted Loans
Some borrowers apply to student loan rehabilitation to get rid of default status on their debt. After making payments for nine months, borrowers achieve this goal. These payments should be consecutive, which is why debtors were worried that the forbearance due to COVID-19 would be a barrier. On the contrary, the forbearance period even supports the rehabilitation process. $0 payments during the non-collection period count for the rehabilitation requirements.
Collections through Different Means
When borrowers cannot repay the debt, the lender can get the payment through wage garnishments or tax refunds. Debtors should be aware that the non-collection period also involves different repayment ways. In other words, the collection through salary or tax refunds is also stopped.
How does Employer Contribution Work?
The stimulus package for student loans involves tax deductions for employers contributing to an employee’s student loan repayment plans. In March 2020, such a stimulus was granted till January 2021 (which is again prolonged for five years).
The advantage of this contribution is still questionable. Some experts claim that this element is more for employers’ favor rather than employees. The contribution to student loans can reduce employees’ mobility and pressure them to stay with the employer. Besides, employers might use student loan repayment contributions as an excuse for higher wages or other benefits.
January 2021- Forbearance Extension
In his first days of presidency, Joe Biden requested the Education Department to extend the debt collection process till the end of September. Before the relief was announced, many people were worried that they would be obliged to repay the debt starting January 2021.
More optimistic experts thought that Biden would be able to extend the collection suspension period till March-end. Luckily, the government prolonged the debt non-collection period, even for a longer period- 8 months. Currently, borrowers are not obliged to make debt payments till September end.
Like previous forbearance periods, people will not be obliged to repay the debt for eight months. During this 8-month suspension period, no interest will accrue. Suspension on collection also applies to wage garnishments and tax refunds. The difference is that this time, the extension is much longer, and there is a reason.
We always advise the borrowers to use the forbearance periods as an opportunity to think about debt resolution tools and develop a plan. However, this period is not only beneficial for debtors. Sure, the government also needs to plan how to resume the debt collection.
When people deal with natural emergencies, the loan default rates spike as soon as debt collection starts. If the lenders start to collect payments in September, there is a high chance that many borrowers will be unable to pay. Hence, default rates can increase. Therefore, such a long suspension period allows the officials to invest time developing sound plans for student loan borrowers.
2021 Stimulus Package
The economic stimulus package worth $1.9 trillion – American Rescue Plan- involves many benefits to borrowers. However, there are no direct advantages in the stimulus package for student loans, except the forbearance period extension announced in January.
When Biden won elections, some borrowers hoped that he would finally be able to bring direct forgiveness. In March 2020, Biden expressed his support for a minimum of $10,000 forgiveness per borrower. However, such a proposal was neither in the campaign plan nor his first stimulus package.
His pick for National Economic Council leader noted that Biden still supports the forgiveness idea and tries to get Congress to approve the bill for this aim. Hence, we can assume that even if forgiveness is not included in the first stimulus package, it might appear in the following government aids.
What is Included?
In the $1.9 trillion rescue plan, many elements aim to stimulate the economy and lend a hand to people in financial difficulties. As mentioned before, there are not many benefits, such as forgiveness mentioned in the stimulus package for student loans.
One of the main benefits of this rescue plan is direct payment to individuals. This benefit was also accessible in previous stimulus packages. In CARES Act, the payment was around $1,200, while in December, it was reduced to $600. Currently, Biden proposed to distribute $1,400 to American adults. Additionally, different from previous packages, adult dependents or families with immigrated parents will also be able to get the direct payment.
Besides direct payments, Biden also wants to increase the unemployment benefit from $300 per week to $400 weekly. The benefit will be accessible to wider groups of people. First, those who lost their jobless payments made via the Pandemic Emergency Unemployment Compensation plan can get assistance.
Moreover, self-employed individuals, independent contractors, or gig workers can qualify. However, they should be in the Unemployment Assistance program due to the pandemic.
Accommodation Assistance/ Rental Help
Another part of the stimulus package presented by Joe Biden involves helping low-income families to pay the rent. The package allocates around $25 billion for the people losing their jobs during the COVID-19 pandemic. Besides rent, the government plans to assist the utility bills by allocating $5 billion. Another $5 billion will be used for immediate help to those facing homelessness.
The federal eviction moratorium, which prohibits landlords from charging fees for unpaid rents, was extended until the end of September.
The President’s American Rescue Plan also involves the extension of food stamp benefits. Again, this benefit is set to expire in September. Moreover, the plan aims to provide food to women, children with $3 billion funds.
An extra $1 billion will be spent to ensure adequate nutrition among US territories. Lastly, it is expected that the restaurants will be involved in partnerships to provide food to workers that lost their jobs and other individuals in need.
For Families with a Child
Luckily, the government plans to bring more benefits if you have a child. The rescue plan requests Congress to create emergency funds worth $25 billion to help families with children. Besides, these funds will benefit child care homes, and they will be able to use the money for different purposes for rent, utility, or employee salary.
There are also provisions for the tax credit. For example, related to the previous point, Biden wants to expand the tax credit for child care as long as one year. In this way, families will be better able to receive back their spending for children younger than 13.
Additionally, the amount of tax credit can also change. Biden proposed to increase the credit to $3,600 and $3,000 for children younger than 6 and 17, respectively. Besides, the tax credit is expected to be refundable.
Besides the mentioned benefits, Biden has proposed the following changes to help people in need:
- Subsidization of health insurance premium till September for people who lost their jobs
- $4 billion allocations for people with mental health
- $20 billion for veterans’ health care needs
- Expansion of Affordable Care Act
- Expansion of paid leave up to 14 weeks
- Support for small businesses worth $15 billion
- Additional $35 billion for financing programs providing low-interest debt
- $170 billion allocations for schools, colleges, or universities to reopen safely
- $20 billion worth investment in vaccination process and $50 billion for the testing process
- Increasing the minimum wage to $15 per hour
Is the Relief Bill in Trouble?
Although there are not many elements in the stimulus package for student loans, it still helps people facing financial difficulties. In other words, if the borrowers receive help for utility, rent, or direct payment, they can be better able to prepare for the repayment.
However, it is mentioned that the $1.9 trillion worth of relief bill might be in trouble. Some experts think that the bill might not get approval from Congress till March. The main reason for the delay is the opposition that the rescue plan faces. Besides Republicans, now key Senate Democrats should also be convinced.
What about Borrowers Left Out?
As mentioned before, even if the government delivers the benefits, many borrowers will not be able to access them. Private loan borrowers especially need to look for alternative ways to reduce debt obligation during the pandemic. This section will look into some options accessible to such debtors. If you cannot decide which one is the most suitable, you can contact our debt specialists.
Student Loan Refinancing
Student loan refinancing is one of the best options available to private borrowers. Refinancing happens when a borrower gets a new loan and uses its funds to pay off all existing debt. As a result, the debtor deals with a single loan. One might question what changes after refinancing. The rationale of refinancing is that the new loan should have better terms, like reduced interest rate and monthly payments. In this way, financially struggling debtors can get rid of the high monthly debt payments quickly.
Certain qualifications make refinancing possible. In more detail, three elements- credit score, income, and co-signer matters. Usually, borrowers with a higher than 600 credit score will be able to get loans with better terms. The income level of the borrower should be stable. Otherwise, the creditors would not risk allocating the funds to potentially unemployed people.
Lastly, a co-signer is required in most cases. The co-signer is a third-party individual responsible for the repayment if the borrower fails. Sure, some companies distribute loans without requiring a co-signer. However, as the creditors take more risks, they would probably ask for a higher interest rate.
Benefits of Refinancing
The suitability of refinancing and its benefits depend on the borrower’s qualification. For example, refinancing is not the best option for federal loan debtors. The reason is that there exist many federal programs benefiting them, like top forgiveness programs. If the new loan brings more favorable terms for private borrowers, applying for refinancing is a great option. Besides, the application process is mostly free of charge. Hence, borrowers do not lose much by applying.
In general, the advantages of student loan refinancing can be:
- Reduced interest
- Decreased monthly payments
- Faster repayment
- Refinancing bonuses
- Move to fixed/variable interest
Consider Before Applying
Previously, we mentioned that the application usually involves no fees. Hence, it is easy and cost-effective to refinance in a few steps on online platforms.
However, applying multiple times and getting rejections can negatively impact credit performance. Before application, the borrowers should at least ensure that they have a high chance of acceptance. Best refinancing companies provide pre-qualification services on their websites. Borrowers can use this function to submit the information and check which interest rate they qualify if they are eligible. Pre-qualification usually does not hurt the credit score while introducing refinancing benefits/drawbacks.
Another option for private borrowers can be debt settlement. There exist third-party debt settlement companies that can guide the borrowers. In general, debt settlement is the process of convincing the lender to agree to a lower lump-sum amount than the total debt owed.
Sure, the lenders can only agree to lower payment if they know that otherwise, the borrower will not pay at all. Therefore, debt settlement works only if the debtor has no other chance and already failed many due payments.
Debt settlement companies help develop a plan so that instead of repaying the debt monthly, the borrower directs funds to a saving account. After a time, some money is collected in this account, which allows the settlement company to convince the lender.
However, borrowers should also keep in mind that the debt settlement can hurt the credit performance. The process is time-consuming and can be expensive, depending on the fees involved.
Contact the Lender
In some cases, the best solution for private loan borrowers is contacting the lenders. If the borrower faces temporary financial difficulty or suddenly loses the job, it is better to immediately inform the lender. In this case, the creditors can advise the further steps. They can agree to grant a forbearance/deferment period or decrease the interest rates for a short period.
Sure, the lenders have no obligation to provide favors. However, if they believe that the borrower has no other option and can default, they can agree to little changes.
Other Options for Federal Borrowers
Only because the government provides help does not mean that the debtors should wait for the federal aid and content themselves with limited assistance, like an eight-month suspension period. You have to stand up and find your way to get rid of the debt. The stimuli package for student loans or the loan forbearance period is only temporary. Instead, you need to look for better options and start working for them.
Different from private debtors, federal borrowers can access more useful programs. Forgiveness, discharge opportunities, repayment plans, consolidation, etc., exist to assist federal loan borrowers. Hence, you need to check these options and find the most suitable one. As a result of applying to the right program, you can get a 100% reduction in debt, rather than waiting for the government’s favor.
Federal debt forgiveness programs exist to bring up to 100% debt reduction. Usually, forgiveness is granted in return for service. For example, the Public Service Loan Forgiveness allows full debt cancellation after serving a minimum of 10 years and making 120 qualifying payments. In turn, Teacher Loan Forgiveness reduces the debt by $5,000 or $17,500 in return for five years of service.
There is another program called Borrower’s Defense to Repayment, which does not require mandatory service. This program is accessible to borrowers if they face misconduct by the school. If a school lies about true education costs, job replacement rates, etc., the debtor can oppose the debt repayment. In this case, the Education Department reviews the case and grants some discharge percentage.
Like forgiveness programs, discharge options can bring up 100% debt cancellation. However, eligibility to discharge is out of the control of the borrower. For example, debtors can make 120 payments while choosing to work in a qualifying workplace for the PSLF program.
Meanwhile, borrowers cannot progress toward loan discharge due to death, disability, bankruptcy, closed school, false certification, etc. These conditions either happen or not, and if they happen, the debt is forgiven.
Repayment plans, especially Income-Driven repayment, serve multiple functions for federal borrowers. First, borrowers get simpler terms to repay the debt effectively. As the monthly payment amount is based on the income level, debtors do not face many difficulties affording it. Besides, after some payment period, borrowers get a chance to eliminate the rest of the debt.
Student Loan Consolidation is usually confused with refinancing. They have similarities but bring different results. Consolidation involves combining all existing loans into one. As a result, the interest rate is usually the weighted average of existing interests. Consolidation is mostly used to simplify the repayment or get eligible for forgiveness programs. Meanwhile, refinancing is useful to access reduced payments and save money.
This guide discussed the main stimulus packages since March 2020 and other benefits for student loans, such as debt collection suspension. Although the government attempts to ease the difficulties borrowers face during the COVID-19 pandemic, debtors should not content themselves with federal assistance.
There are not many benefits in the stimulus package for student loans, except the forbearance period with 0% interest. When the debt collection is resumed, many borrowers will continue struggling with the debt payments. Hence, during the current 8-month suspension period, it is a better idea to look for other solutions.
We presented several alternatives both for private and federal borrowers. If you want to get more information, you can immediately check our blogs or contact the Student Loans Resolved experts.