Experts: CARES Act student loan provisions are a good thing

Borrowers urged to take full advantage of the break in payments

Published: May 20, 2020
By Brendan Howard

Art by Tamara Rees

Among the financial supports provided by the U.S. pandemic response law known as the Coronavirus Aid, Relief and Economic Security (CARES) Act is one that many student-loan borrowers might view with disbelief:

For a full six months, they would not have to pay one penny on their educational debt, and interest wouldn't pile up, either.

"The CARES Act sounded too good to be true," said Betsy Mayotte, president of the nonprofit Institute of Student Loan Advisors, who counsels students and borrowers on student debt. "It wasn't."

Wasn't too good to be true, that is. Mayotte and other student loan advisers hail the law and encourage borrowers to take full advantage of what it offers them.

Temporary relief from loan payments is just one of the benefits in the CARES Act passed on March 27 in response to the COVID-19 health crisis and consequent economic fallout. They include economic stimulus payments to individuals, expanded unemployment benefits, COVID-19-related medical coverage and leave, and Small Business Administration loans to cover payrolls and revenue shortfalls.

For borrowers of federal student loans, the CARES Act automatically suspends debt payments through Sept. 30, and interest charges do not accumulate in the interim. Further, borrowers aiming toward loan forgiveness — either by working in jobs that qualify for Public Service Loan Forgiveness (PSLF) or via income-driven repayment plans that reward 20 to 25 years of payments — will not be set back. The suspended payment period will be credited toward forgiveness as six monthly payments.

No interest, no payments, and credit toward loan forgiveness make the law a benefits "trifecta," said Dr. Tony Bartels, debt education director at the Veterinary Information Network, an online community for the profession. Bartels also is a board member of the VIN Foundation, which provides free information for borrowers through its Student Debt Center. The federal suspension of payments due happens automatically, requiring no action on the part of borrowers. Upon request, lenders must refund any payments made since March 13.

How much money the reprieve will save the average veterinarian with school debt is impossible to say. That's because many veterinarians, especially those earlier in their careers, have so much educational debt — the mean for the class of 2018 was $183,014, according to the American Veterinary Medical Association — that many chip away at it through an income-driven repayment plan. Under such plans, borrowers' monthly payments are limited to 10% or 15% of their discretionary income.

Ten states aim to expand relief

For all its upsides, the Coronavirus Aid, Relief, and Economic Security (CARES) Act does not provide help to borrowers of student loans not held by the U.S. government. Ten states have stepped in to help.

California, Colorado, Connecticut, Illinois, Massachusetts, New Jersey, Vermont, Virginia and Washington announced in late April that they had worked together to expand relief to borrowers not covered by the federal law, following New York's announcement of a similar deal on April 9.

The states persuaded more than a dozen private lenders to give forbearance for at least 90 days. Forbearance allows a pause in payments, although interest continues to accrue. The interest also might be capitalized, meaning it's added to the principal, causing the borrower to pay interest on interest.

Participating private lenders also agreed to cease debt collection lawsuits for 90 days, waive late-payment fees, and ensure borrowers are not subject to negative credit reporting, according to an announcement from the California Department of Business Oversight. Overall, the provisions fall short of CARES Act benefits, which suspend payments and interest through September on federal loans.

A crucial difference between CARES Act and state-negotiated benefits is that borrowers must contact their loan servicers to request the benefits on private loans, said Dr. Tony Bartels, debt-education director at the Veterinary Information Network.

Noting that the overwhelming majority of veterinary student loans are federally held, Bartels advises borrowers with loans from companies offering forbearance to clarify with their loan servicer how interest will accrue, whether it will be capitalized, and when payments must be made next.

One important caveat about the CARES Act debt relief: It applies only to several specific federal student loans. They are: all Direct Loans ("Direct" is in the loan name); some Federal Family Education Loans and some Perkins Loans (if owned by the Department of Education). Loans that are not covered by the law include Health Professions Student Loans and Loans for Disadvantaged Students, which are funded by the federal government but held by colleges and universities; and loans made by private institutions.

Another aspect of the debt-relief legislation is that involuntary collection on federal loans for those in default is suspended through Sept. 30.

Further, those worried about what six months of no payments will look like to credit agencies need not be: During the suspension, the law requires lenders to report suspended payments as if they were regular payments.

After Sept. 30, borrowers will be expected to resume making payments. Those whose payments are automated can expect deductions from their bank accounts to resume then. 

There is a chance that Congress will extend more help. On May 15, the U.S. House of Representatives passed further relief measures through The Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act. For federal educational-loan borrowers, it would extend the suspension of payments through September 2021, and offer $10,000 of loan forgiveness to some who hold federal or private loans. The legislation is expected to be considered by the Senate after May 25. Senate leaders have indicated dissatisfaction with the bill as-is, so its provisions are likely to change along the way.

Strategic use of savings

What's the best use of saved payments? For borrowers who don't need the money to cover essentials, student loan advisers have a few suggestions.

Mayotte recommends saving emergency funds to cover a prospective job loss or COVID-19-related disability. "If you have an emergency fund, make yourself a bigger one," she said.

For those who have ample emergency funds already, Dr. Darby Affeldt, a veterinarian and an independent financial adviser with North Star Resource Group, recommends paying down any high-interest loans and credit card debt, or funding retirement accounts.

"Borrowers have a free hall pass," Affeldt said. "Do something productive with the money." 

Bartels, the VIN staff member who counsels colleagues and students on veterinary school debt, comes by his expertise personally as well as professionally: He and his wife have considerable veterinary school loans of their own. Both use income-driven repayment plans that provide for debt forgiveness after 25 years of qualifying payments. Loan forgiveness provides an eventual end to school debt for borrowers who owe a lot, relative to their income. However, forgiven balances are treated as taxable income, which, depending on the amount and the borrower's tax circumstances, could result in a sizable tax bill.

Thinking about that distant future, Bartels and his wife regularly put away money, whether in savings accounts, certificates of deposit or other investments, toward the anticipated tax bill. Bartels recommends that fellow borrowers do the same. Now he worries that the pandemic might interfere with people's ability to do so.

"It's hard enough to save for forgiveness," Bartels said. "Now we have this major interruption affecting our health and economy, and who knows for how long and what magnitude? This will interrupt a lot of forgiveness planning." So his advice for those looking for smart uses of their saved loan payments is to earmark some or all of it for the forgiveness tax hit.

In sum, the six-month suspension of student debt payments provided by the CARES Act is a real benefit, with no catches.

As Bartels wrote on a message board of VIN: "Take the break, keep the money and enjoy the time you're logging towards forgiveness without having to pay anything through at least Sept. 30, 2020."

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