How Does The Stimulus Package Affect Student Loans
The Stimulus Package and Student Loans
The stimulus package is a series of economic measures and tax cuts that were passed by Congress in an effort to boost the economy in the wake of the 2008 recession. As part of this package, Congress established new funding for Pell Grants and increased funding for federal student loans.
The stimulus package did not directly affect student lending, but it did affect the market for student loans indirectly by increasing demand and decreasing supply. This means that more students who would not have been able to afford college without financial aid were able to attend college thanks to these new programs. It also meant that colleges could admit more students because they knew they would have more money available to pay tuition costs once they enrolled.
However, while the stimulus package increased access to higher education for many students, it also made it easier for students with poor credit scores or little savings to borrow money from banks or other lenders who were willing to offer loans at lower interest rates than what was available before the recession hit (and continues today). This has led some experts[1] [2] [3] [4] [5] – including some members of Congress[6],
How Does The Stimulus Package Affect Student Loans
The new stimulus package can help you pay off student loans faster.
Here’s what you need to know.
Student Loans
The new $900 billion stimulus package that President Donald Trump signed into law has several benefits, including a second stimulus check, enhanced unemployment benefits and small business loans. If you’re one of 45 million borrowers with student loan debt, then you may be wondering whether Congress included any student loan relief in the stimulus bill. What changes can you expect for your student loans in 2021? Here’s what the stimulus package means for you student loans:
- Your employer can pay off your student loans
The Cares Act — the $2.2 trillion stimulus passed in March — provides a tax incentive for your employer to help pay your student loans. That’s not a typo. Your employer can make tax-free student loan payments on a qualified education loan up to a maximum of $5,250 for each employee. This includes both federal student loans and private student loans. In the new stimulus package, Congress extended this student loan relief for five years through December 31, 2025. In addition to helping with your student loan repayment, you can save income taxes and your employer can save payroll taxes. Check with your employer to determine if your employer offers this student loan benefit.
PROMOTED
- Use your $600 stimulus check to pay off student loans
The new stimulus package includes a $600 stimulus check for each individual taxpayer with an adjusted gross income of $75,000 or less, or a $1,200 stimulus check for married or joint filers with an adjusted gross income up to $150,000. Higher income earners may be eligible for a smaller stimulus check. Dependents age 16 and younger may be eligible to get a $600 stimulus check too. While you can spend, save or invest your stimulus check, another option is to pay off student loan debt. You can choose whether to pay off federal student loans, private student loans or both. It’s likely that a $600 stimulus check won’t solve all your student loan problems—but it can certainly help.
While federal student loans are temporarily paused through January 31, 2021, you can still make an extra student loan payment to lower your principal balance. Contact your student loan servicer in writing regarding your plan to make an extra student loan payment. Your extra student loan payment will first be applied to any outstanding accrued interest. Once your accrued interest is paid, or if you don’t have any accrued interest remaining, your student loan payment will be applied toward your principal balance. The faster you can pay off your principal balance, the faster you can pay off student loans. Why pay off federal student loans now if you don’t have to? Currently, there is no new interest accrual on your federal student loans, meaning no new interest is being added to your student loan balance through January 31, 2021. So, assuming you pay off any past accrued interest, your stimulus check could be applied directly to reduce your principal balance.
cares act student loans
As soon as everything began shutting down in an effort to slow the spread of COVID-19, the economy started to take a big hit. So, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (aka the CARES Act) in March 2020 as a way to help keep Americans and businesses afloat as we ride out this pandemic.
You know that stimulus check that hit your bank account? Yeah, that’s part of the CARES Act. Under the act, the government gave out $2.2 trillion to help ease some of the financial loss due to the coronavirus.1 Most of the money went toward individual American taxpayers, unemployment funds, small business loans, medical equipment for hospitals and local government.
But there’s more to the CARES Act than just handing out checks—it also comes with some changes in favor of borrowers, specifically those with student loans.
What Does the CARES Act Say About Student Loans?
Believe it or not, there are 42.9 million borrowers who, put together, owe about $1.6 trillion in federal student loan debt.2 Wowza! And those who have recently lost their jobs are too busy trying to pay their mortgages and feed their families to worry about their student loan payments right now.
So, under the CARES Act, payments for federally owned student loans are temporarily suspended until May 1, 2022.
What does that mean? Well, normally, you would have to prove you can’t make payments with your current income in order to get student loan forbearance or deferment. (Forbearance and deferment are just fancy words to describe putting your payments on hold. The difference is that interest continues to grow with forbearance but may or may not with deferment.) But under the CARES Act, all federal student loans have been automatically placed in forbearance. So, you won’t be charged anything on your student loans until May 2022, not even interest payments—but you’re still able to keep paying on them if you want.
But that’s not all. Under the CARES Act, there’s currently a 0% interest rate for all federal student loans. So, any payments you make toward those loans right now will go straight to the principal (the original amount you borrowed), and your loan won’t grow in interest.
Which loans qualify?
Federal student loans that are owned by the U.S. Department of Education are covered under the CARES Act. This includes Direct Stafford Loans, Direct PLUS Loans for parents and graduate students, and Direct Consolidation Loans. It also covers two other kinds of student loans, but only when they’re not owned by commercial lenders: Federal Perkins Loans and Federal Family Education Loan (FFEL) Program loans.
Any private student loans or loans that aren’t federally owned are not covered under the act. So, sorry, but Sallie Mae is still going to expect her monthly payment.
If you’re not sure who owns your student loans, you can check here. If you see ED next to the loan, that means it’s owned by the Education Department and is covered under the CARES Act.
How long will it last?
For now, about 26 months. No payments are required on federal student loans from March 13, 2020 until May 1, 2022. Same goes for the 0% interest. If, for some reason, you were already charged after March 13, 2020, that payment will automatically go toward the principal. And as long as unemployment and the economy stay on track, the May 1st date should stay the same.
Will my payments be forgiven during this time?
No—the government is not paying your student loans for you during this time. It’s just letting you delay the payments. So, if you don’t pay anything toward your student loans until May 2022, you’ll still owe the same amount you owed before the CARES Act took effect.
And if you’re applying for the Public Service Loan Forgiveness (PSLF) Program, this suspension won’t affect your eligibility. But student loan forgiveness isn’t something you should get your hopes up about. You’re better off taking control of your own financial future, instead of waiting on the government to save you.
How Does the CARES Act Affect My Credit?
If you choose to not pay your federal student loans during this time, it won’t affect your credit. Your student loans will still show up on your credit report, but as long as you were in good standing before the CARES Act, this pause won’t hurt your credit score.
And if you had already defaulted on your federal student loans, there’s some good news for you. Right now, student loan collections are on pause. That means the government can’t take money out of your paycheck, tax return or Social Security to make sure you pay. But it’s not exactly a free pass—this is your chance to catch up on those payments if you can and get back on track.
But global crisis or not, avoid getting sucked into worshipping at the altar of the almighty FICO. Instead, focus on taking care of you and your family and getting rid of your debt for good.