Options for clients with student loans during the pandemic

By Courtney L. Vien

Due to the economic downturn and widespread layoffs caused by the coronavirus pandemic, some of your clients or their family members may be struggling to pay their student loans right now. The federal government has offered borrowers some relief: The Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, suspended payments for borrowers with loans held by the Department of Education (ED) from March 13 through Sept. 30. But borrowers with other types of loans have options as well.

Relief through the federal government

Under the CARES Act, clients with Direct Loans or Federal Family Education Loans (FFEL) held by the ED do not need to make any payments until Sept. 30. Interest on these loans has also been waived through Sept. 30.

The suspension of student loan payments is automatic. Borrowers do not have to take any action to have their payments halted, even if they have automatic debit set up, said Ross Riskin, CPA/PFS, assistant professor of taxation at the American College of Financial Services and the author of The Adviser’s Guide to Education Planning.

That’s important for clients to know, Riskin said, as scammers have been contacting some borrowers claiming they need their information for them to be eligible for student loan relief.

Borrowers who made a payment after March 13 can have it refunded if they choose, he said.

For borrowers working toward public service loan forgiveness, this six-month period will count toward loan forgiveness even if they do not make any payments, as long as they are still employed full time by eligible employers.

For at least 60 days following March 13, the ED will not garnish the wages of borrowers with federally held student loans who are in default, or offset money from their Social Security checks or federal tax refunds. Anyone who had money taken out of a tax refund check between March 13 and March 27 will have it refunded, said Melissa Towell Maguire, a student loan counselor for not-for-profit credit counseling agency Consumer Debt Counselors.

Eligibility for relief through the CARES Act

Only borrowers with loans held by the ED are eligible for relief under the CARES Act. Borrowers with private loans, Perkins loans, or FFEL loans not held by the ED are not. FFEL loans were issued prior to 2010, and the majority are still held by commercial lenders and were guaranteed by the federal government, Riskin said, so borrowers must do their due diligence to make sure they have eligible loans if they are seeking relief.

To find out whether their loans are covered by the CARES Act, borrowers can contact their loan servicers or visit studentaid.gov. Borrowers in default can go to studentaid.gov and download their file from the National Student Loan Data System to see whether their loans are guaranteed by the ED’s Default Resolution Group, a state guarantee agency, or another guarantee agency, Maguire said.

Options for borrowers who aren’t eligible for relief

If your clients or their family members have student loans that aren’t covered by the CARES Act but are finding it hard to make payments, there are options.

Borrowers can obtain a deferment any time there is a national emergency, even if they have privately held loans, Maguire said. These deferments aren’t made available automatically, so borrowers will need to contact their loan servicer.

Some borrowers whose loans aren’t covered by the CARES Act may be tempted to consolidate their loans into federal loans so they can qualify for the six-month suspension of payments. Think carefully before taking such a step, Maguire and Riskin caution.

“It can take anywhere from six to 12 weeks to be approved for a consolidation,” Maguire said. By the time a borrower is approved, he or she might fall under the CARES Act for only a month or two, she said.

Borrowers who have FFEL loans and are working toward loan forgiveness under an income-driven repayment plan, such as income-based repayment, need to be especially cautious about consolidation, as consolidating to a Direct Loan will “reset the clock” toward loan forgiveness, Riskin said. For example, if a borrower has made 100 of the 300 payments needed to qualify for loan forgiveness and then consolidates to a Direct Loan, none of the 100 payments previously made would count toward forgiveness if the borrower chooses to enroll in an income-driven repayment plan for the new loan.

Options for clients who’ve lost jobs or had their hours reduced

Anyone filing for unemployment can also get an unemployment deferment of their student loans, Maguire said, which will allow them to postpone payments for six months. Borrowers can file for additional deferments once this six-month period ends.

Clients who have been furloughed or had their work hours reduced may want to apply for income-driven repayment plans (IDRPs), both Riskin and Maguire said. Borrowers who are already on an IDRP can recertify their income, letting their student loan servicer know their income is lower, so their payments can be adjusted.

Clients who are able to pay their student loans should do so

Borrowers are still able to make student loan payments on loans held by the ED between now and Sept. 30 if they choose. In fact, it’s beneficial for them to do so, said Riskin, because they’ll be able to take advantage of the zero percent interest rate. Any payments made between now and Sept. 30 will go directly toward principal after a borrower has paid any interest that accrued prior to March 13, meaning borrowers will pay less on their loans overall.

In fact, due to the current low-interest-rate environment, many borrowers may consider turning down the benefits of the CARES Act regarding student loans and refinance with a private loan, Riskin said.

“In certain instances, you may be better off forgoing the federal benefits if you can get a 2% or 3% interest rate and favorable repayment terms in the private loan market,” he said. “The savings may be greater in the long run.” Borrowers should speak with a CPA financial planner to determine if this is a good option for them, he said.

For more news and reporting on the coronavirus and how CPAs can handle challenges related to the outbreak, visit the JofA’s coronavirus resources page. For more information on student loan planning, read The Adviser’s Guide to Education Planning (PFP Section membership required).

Courtney L. Vien (Courtney.Vien@aicpa-cima.com) is a JofA senior editor.

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