As discussed in our summary, the CARES Act stimulus package signed into law Friday creates a number of avenues for struggling businesses and individuals to seek relief and financial help. The massive scope of the plan means that many of the programs will take some time to be implemented, and it is expected that the direct one-time payments of cash promised under the law may take weeks, if not months, to be delivered. One feature of the new law, however, can provide more immediate and possibly more substantial relief.
Student loan borrowers now have the option to take up to a six-month break from making payments on their federally backed student loans. The law allows borrowers to delay payments through Sept. 30 without interest accruing, and it puts a moratorium on garnishment of wages, Social Security and tax refunds for student loan debt collection. Effectively, all phases of the student loan repayment process can be paused for up to six months.
Depending on the amount of a borrower’s monthly student loan obligation, this savings may provide substantially more relief than the $1,200 cash payments forthcoming under the law and in a more expedient fashion. Importantly, these pauses are not automatic. Borrowers will need to contact their student loan servicer to take advantage of the optional break.
Those eligible for the temporary break on student loan payments include borrowers under the Public Student Loan Forgiveness Program, which allows borrowers who work in certain public or nonprofit sector jobs to have their federal student loan debt forgiven after 10 years of on-time payments. Unfortunately, the six-month forbearance option does not apply to private student loan borrowers.
Despite discussion of cancellation of student loan debt during its drafting and negotiation, no such provision made it into the CARES Act, but the idea will likely be part of future stimulus and relief proposals debated in Congress. Phelps will monitor these developments and provide updates as more information becomes available.
UPDATE - March 30, 2020: Under the new law, the suspension of federally backed student loan payments will be automatic with no action required by the borrowers. This is a departure from the 60-day forbearance option made available earlier in March which required borrowers to contact their loan servicers and request a forbearance. The new law requires the Education Secretary to notify borrowers of the changes to their loans within 15 days of the enactment of the law. The Secretary will then be required to provide borrowers with 6 notices beginning August 1 indicating when their respective payments will resume and providing options to enroll in an income-based repayment plan.