In March 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was a $2 trillion stimulus bill passed by U.S. lawmakers and signed into law by President Trump to help alleviate some of the devastating impact created by the global COVID-19 pandemic. As part of the CARES Act, federal student loan payments were put on pause, meaning that any borrower was not required to make payments toward any outstanding student loan balances and balances would not accrue interest during this period. The forbearance was intended to alleviate some of the financial burden millions of Americans faced during the pandemic.
In general, loans covered under the CARES Act forbearance are owned by the U.S. Department of Education. These loans include the Direct Stafford Loans, Direct PLUS Loans for parents and graduate students, and Direct Consolidation Loans. Two additional loans, Federal Perkins Loans and Federal Family Education Loans (FFEL), are also covered, but only when these two loans are not owned by commercial lenders. Unfortunately, any private loans or loans not owned federally are not covered under the CARES Act.
The CARES Act originally was scheduled to last six months, ending in September 2020 but was extended multiple times, first to December 2020, then through January 2021, again through September 2021, and just recently, through January 2022. The announcement of this most recent extension is likely to be the last, though this has yet to be confirmed and discussions about student loan forgiveness have continued to be a prominent discussion in Congress. One common campaign promise of the 2020 Presidential Campaign was some level of student loan forgiveness, although at this moment, this seems an unlikely deliverable. Under current law, President Biden can forgive up to $10,000 worth of student loan debt for every borrower without Congressional approval. If any loan debt forgiveness program greater than $10,000 per borrower were to be approved, a bill would have to originate and be passed by Congress before being signed into law.
With no concrete changes put into motion yet, we can anticipate and plan that the forbearance period will expire and payments with interest will once again resume in February 2022. Best practice suggests communicating with loan servicers to verify payment due dates.
As the forbearance period end is near, we suggest a few strategies that may help manage student loan debt and actions to take now, keeping in mind that everyone’s financial situation is different.
Re-establish your monthly auto-pay – For those who decided to partake in the forbearance period and withhold payments, it may be a good idea to re-establish monthly auto-pay service. Auto-pay often can help borrowers avoid penalties and, in some cases, higher fees.
For borrowers who are disciplined to log in to their loan accounts online and submit payment on a regular basis, re-establishing routine is necessary. Getting back in step will help avoid paying for penalties and fees incurred when payments are made past-due.
And, for borrowers who have continued to make payments during the forbearance period, a push to continue to pay off principal while the 0% interest benefit remains is advantageous and incentivizing.
We’d like to call to attention all student loan borrowers: the end of forbearance is a good time to review your debt repayment strategy with your advisor. 2020 is in the books and as we near the end of 2021, preparing yourself and engaging in collaborative communication about your financial forecast may benefit you and offer you greater sense of security.
Pros and Cons of Restructuring Debt – As with most situations, there are pros and cons. Restructuring debt is no different. In short, restructuring debt is a process that allows individuals, or companies, to avoid the risk of defaulting on their existing debts through various methods and strategies.
For individuals, some general instances of restructuring debt are negotiating the terms with creditors or tax authorities, debt consolidation, or debt refinancing. For student loan debt restructuring, some strategies may include private refinancing, utilizing other lines of credit (such as HELOC) to pay off student debt, or using other assets to pay off a lump sum.
Potential Advantages of restructuring debt are lower interest rates, steering clear from a declaration of bankruptcy, better financial management, and protection of certain assets.
Potential Disadvantages of restructuring debt are adding new accounts or inquiries to your credit history, higher initial expenses and fees to restructure, or a prolonged repayment period.
If you decide to refinance your federal student loans with a private lender, you will not benefit from any future legislation changes such as forbearance or cancellation, and you would no longer be eligible for federal income-based repayment options in the event of a loss or reduction of income.
We’ve listed the basics, but pros and cons of restructuring debt can be as unique as the borrower and his or her needs. Speaking with a financial professional can help map out pros and cons to allow the borrower to make sound decisions to best suit him or her.
Not a ‘One Size Fits All’ Solution – Each individual’s financial situation is different, just as each individual is different. Working within the context of your cash flows, assets, and liabilities are key determinants as to which solution or strategies may best work for you.
Review with your advisor – You and your financial advisor are set up to work as a team to benefit you and your future. Your advisor is a resource dedicated to serve you, and we urge you to explore our offerings, especially in situations where the laws are in flux and changing on the fly.
Depending on your financial situation, your financial advisor may suggest alternative strategies or a shift in your financial plan to better position you for when the forbearance period is scheduled to end. And for those with loan balances greater than $100,000, there are some additional student loan repayment strategies that your financial advisor may deem applicable to you. In all, openly speaking with your advisor may help you get ahead of the curve and continue to put you in the best possible financial situation.
From March 2020 until now, we’ve all experienced or witnessed changes directly associated with the pandemic and its effects. Although forbearance on student loan debt was extended through January 2022, we should be mindful to plan accordingly. Private Capital Group and our Wealth Advisors are eager to help you or your loved ones create a financial plan tailored to your needs.
If you are unsure about how the end of the student loan forbearance period affects you, how to properly prepare your financial plan to begin repayment of student loan debt, or would like to revisit your financial plan altogether, be sure to speak with your PCG Wealth Advisor. We are here for you, and we have your back!