Private Client Services Update – Relief for Student Debt Because the Government CARES (Act)

    By Christopher L. McLean, Estate, Trust & Wealth Transfer

    A lot of advisors’ attention over the last few weeks has been focused on the small business relief aspects of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), as the appropriations thereunder are so significant. However, while recent times have shown the Department of Education uninterested in providing much assistance for student loan borrowers, the U.S. Congress has stepped in and provided rare, temporary relief for borrowers trying to manage during these uncertain times.

    Millions of young adults nationwide struggle with managing student loan debt payments while handling the day-to-day expenses of life during normal times. Now, many young professionals—especially those in the medical field who are dealing with decreased pay despite increased hours working on the frontline battling this pandemic—are trying to deal with the added financial and emotional strains caused by the pandemic.

    The CARES Act provides a bit of relief to remove the stress of borrowers figuring out how to make the next six (6) monthly installments on federal student loans. For most federal student loan borrowers, the CARES Act offers substantial relief by automatically suspending monthly payments starting March 13, 2020, through September 30, 2020, and reducing interest to 0% during this time period.

    To what federal loans does this relief apply? Direct loans, Perkins loans and Federal Family Education Loans owned by the U.S. Department of Education. In other words, if a borrower’s loans are with the federal government, then relief is likely available. If a borrower’s student loans are “private” with a bank or institutional lender—not the federal government—unfortunately, he or she will not get relief under the CARES Act.

    What happens to interest under the suspended loans? Interest is reduced to 0% for the forbearance period, and unpaid interest will not be capitalized during or after the forbearance period. In other words, the entire federal student loan—principal and interest—will be paused altogether.

    What do borrowers need to do to get relief? Nothing. If a borrower’s payments are under auto-debit, then the suspension should occur automatically. If a borrower physically makes payments each month, he or she simply does not need to cut a check for any installment payment during this period.

    What if a borrower has made a payment after March 13, 2020? The borrower is entitled to a refund of the full amount and should contact his or her loan servicer accordingly if reimbursement is desired, or elect to apply the payment toward the principal, as explained below.

    What if a borrower wants to keep making payments? Any payments made during this time will be applied 100% toward principal under the borrower’s student loans, so some borrowers who can afford to continue to make payments, or even extra payments, can make a good dent in their outstanding principal balance and help pay off the debt faster. However, for candidates for Public Service Loan Forgiveness (“PSLF”), making payments during this period will not be beneficial for qualification for PSLF, as these payments will not count extra toward the 120 monthly payments for forgiveness.

    What is PSLF? Under PSLF, borrowers with federal loans directly with the U.S. Government can qualify for loan forgiveness after making 120 monthly payments while working full-time for an eligible employer, which includes government agencies and nonprofit organizations. A lot of young professionals in healthcare/medical professions working for nonprofit organizations (for example, many hospitals or federally qualified health centers) and professionals working for the federal government are eligible for PSLF. Additionally, payments made while on an “income-driven repayment plan”, which reduces monthly installments to a percentage of income and extends the term of repayment, count as qualifying payments for PSLF.

    Will this forbearance impact eligibility for PSLF? No. The Department of Education recently released updated FAQs stating that each suspended payment will count as a qualifying payment for PSLF so long as the payment would otherwise have met PSLF’s requirements. Accordingly, if the borrower continues working full-time for an eligible employer during the forbearance period, then each suspended payment will count toward the 120 payments for forgiveness.

    What if a candidate for PSLF is laid off or furloughed, or his or her working hours are reduced? Borrowers who experience a layoff, furlough or reduction in hours to fewer than 30 per week will be impacted differently due to the change in employment status with the eligible employer. Suspended payments—or electing to continue to make monthly payments—during this time would not count toward the 120 payments for forgiveness under PSLF. If a borrower is in this category, he or she will not lose eligibility for PSLF, as the 120 payments for forgiveness do not need to be consecutive. However, once the borrower returns to full-time employment with an eligible employer, payments at that time will start counting again toward the 120 payments for forgiveness under PSLF.

    So…what should borrowers do? Each borrower’s situation is different. With that said,

    1. If a borrower continues full-time employment with an eligible employer through September 30, 2020—remaining eligible for PSLF—then he or she should not make any payments during this time and take full benefit from the CARES Act relief.
    2. If a borrower experiences a change in circumstance during this time (laid off, furloughed, or hours reduced to fewer than 30 per week) and expects to return to eligible employment for PSLF qualification, then he or she may want to also take full benefit from the relief and not make payments.
    3. On the other hand, if a borrower does not qualify for PSLF and does not plan to qualify, then he or she may want to consider electing to continue making payments (or additional payments) during this period if able to do so, as 100% of each payment will be applied to principal and contribute to paying off the student loan sooner.

    For many professionals, student loan debt can make up a significant portion of their financial horizons, so making the proper decisions now can have an impact on estate planning options in both the near and long-term futures. Please feel free to reach out to any of our Private Client Service Group members with any questions.

    Our firm is constantly providing updated legal guidance on COVID-19 issues on our website; please visit the COVID-19 Legal Resource Center. Please do not hesitate to reach out to any of our firm’s lawyers to discuss how we can assist your practice during this crisis. 

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.