Borrowers closely tracking the student loan news are likely to have heard many contradictory things as a result of the rapidly changing government response to the COVID 19 crisis.
  

On March 13, 2020, the Executive Branch suspended interest on federally held student loans and announced that borrowers could suspend payments temporarily by requesting administrative forbearance.  Shortly after, the Senate proposed additional student loan relief provisions.  Ultimately, on Friday, March 27th, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) passed in the House and was signed into law by the President. The CARES Act is where to focus your attention now.  Also note that further student loan relief could be included in future legislation. 
 

The CARES Act includes payment suspension, interest waivers, and collection suspension for federally held student loans only. Federally held student loans include all types of Direct Loans (Direct Unsubsidized, Direct Subsidized, Direct Parent PLUS, Direct Grad PLUS, and Direct Consolidation Loans).  If you started borrowing federal loans in the last decade, the lion’s share of your federal loans will be covered.
 

Roughly 9 million borrowers have at least one student loan that isn’t covered (according to an estimate by the National Consumer Law Center).  Critically, private loans are not included in the CARES Act provisions, but some federal loans aren’t either.  

Specifically, Perkins Loans are not federally held (they are campus-based), and older federal loans issued before 2010 through the Federal Family Education Loan program (FFEL) are not included as long as they are “commercially-held”.  FFEL loans were originated by banks and private lenders.  Some FFEL loans were later acquired by the federal government.  The federal government acquires FFEL loans under specific circumstances including default.  So some FFEL loans are owned by the Department of Education, and those are covered by the CARES Act.  
 

To determine whether you have commercially held or federally held FFEL loans, review your federal student loan record and find the “current holder”.  Federally held FFEL loans will list the U.S. Department of Education as the current holder.  Access your federal student loan record through StudentAid.gov.
 

The CARES Act extends the interest waiver begun by the executive branch through September 30, 2020.  The CARES Act has an effective date of March 27, but the administrative interest waiver began on March 13 (and to the extent it takes a while to implement, we’re told the waiver will be applied retroactively to March 13). During the interest waiver, interest will not continue to accrue on the principal balance of your covered loans.  
 

In typical debt repayment scenarios, each payment covers the interest that has accrued since the last payment as well as some amount of principal reduction.  For example, when you send a payment to your car loan, the first portion of the payment is attributed to the interest that has accrued since your last payment, and any remaining portion is attributed to reducing the principal balance of the loan.  Reducing your principal balance causes less interest to accrue each month, because you’re charged interest on a lower principal balance.  The idea is that you pay all the interest and some of the principal each month until the loan is fully repaid.

But student loans don’t always require borrowers to keep up with all the interest as it accrues (that’s called negative amortization, meaning you owe more each month instead of less).  For this reason, a student loan balance is made up of two parts: a principal balance upon which interest normally accrues, and an unpaid accrued interest balance (assuming the borrower has not fully paid the interest as it accrued).  Borrowers are not charged interest on interest, unless or until that unpaid interest is added to the principal balance of the loan (known as capitalization).  

Because student loan borrowers may postpone payment of accruing interest (while enrolled in school full-time, during periods of forbearance, and while enrolled in Income-Driven Repayment), some borrowers owe both principal and unpaid interest.  Importantly, borrowers enrolled in Income-Driven Repayment plans are permitted to make payments that do not fully cover accruing interest and are most likely to have outstanding interest.  

Payment allocation rules that require that payments be applied first to unpaid interest. Borrowers with outstanding accrued interest cannot reduce the principal balance of their loans unless or until the already accrued interest balance is fully repaid.  So if you have already paid all the interest that accrued before the interest waiver and you can afford to continue making payments, you could reduce your principal balance more efficiently during the waiver period and save money over time.  But if you owe unpaid interest, payments you make will not reduce your principal until that is paid off.
 

The CARES Act suspends all payments on non-defaulted federally held student loans until September 30, 2020.  Before passage of the Act, the executive branch indicated that borrowers would have to request forbearance, but now payment suspension is supposed to be automatic.  What we don’t know is whether the loan servicing companies will be able to immediately implement the payment suspension, or whether scheduled auto-debits will proceed.  Borrowers needing to hold onto their cash should consider whether to withdraw consent for auto-debit to prevent that possibility.

Under the CARES Act, each month of suspended loan payments will count as if the borrower had made a payment towards Income-Driven forgiveness or Public Service Loan Forgiveness, and towards loan rehabilitation. Note that the executive branch previously indicated that borrowers would have to make payments in order to progress towards forgiveness, but that has been changed by the Act.  Also, suspended payments will be reported to consumer credit reporting agencies as regularly scheduled payments made by the borrower.

The Act also requires notification to borrowers within 15 days of enactment (so by April 11, 2020) of the temporary suspension and of borrower’s option to continue to make payments. The Act further requires six notices to borrowers, beginning on Aug. 1, 2020, informing them that the temporary suspension period is ending, and reminding them of their obligation to resume repayment. The notices are required to include information about income-driven plans.

If you did withdraw consent for auto-debits, you will likely need to take action to restart those.  Don’t expect the resumption of payments to necessarily be automatic.

How Do I Figure Out How This Applies to Me and What to Do?

1)  First, get a clear inventory of your federal student loans.

• Look up your federal loans at StudentAid.gov

• Loans called Direct are covered by the CARES Act interest waiver and payment suspension.  Determine if you have any commercially held federal loans that aren’t subject to the interest waiver and payment suspension (look at the detailed data download and examine loans that don’t have “Direct” in the name to determine the holder)

• Review each loan to know whether or not you owe unpaid accrued interest

2) For federally held loans covered by the CARES Act, decide whether or not to make payments during the interest waiver and payment suspension period based on your cash-flow and whether you owe unpaid interest.  If you can afford it and you can reduce your principal during this time (and you don’t anticipate forgiveness), it makes sense to pay down principal.

3) If you have commercially held federal loans not covered by the CARES Act and you can’t afford to keep paying as usual: consider switching to Income-Driven Repayment or requesting a recalculation of your IDR payment based on a reduction in income.  Consider also the pros and cons of consolidating into Direct (pro: Direct Loans are covered by the CARES Act and have most repayment and forgiveness options; con: consolidation pays off the underlying loans, capitalizes unpaid interest, may increase the interest rate, and resets progress toward Income-Based Repayment forgiveness).  Finally, consider requesting a forbearance so you can postpone payments altogether for a time.

4) If you are certain to benefit from tax-free Public Service Loan Forgiveness, you have nothing to gain by making payments on those loans during the interest waiver and payment suspension period.  Avoid forbearance so that you keep progressing toward forgiveness.

5) Make a separate plan for any private loans.

• Look up your private loans from your free credit report at annualcreditreport.com

• Contact your lender if you need payment relief and ask about options (they aren’t required to help you, but at least some lenders are being more flexibility during this crisis).