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  • Writer's pictureJeran Van Alfen, CFP®

2020 CARES Act and Your Student Loans

The CARES Act was passed in March to provide support against the negative financial impact of Covid-19. Whether you are experiencing financial difficulties or not, you can take advantage of provisions in the CARES Act to get ahead on your student loans. Here is what you need to know:

How does the CARES Act affect student loans?

All changes that were introduced by the CARES Act apply to Direct loans and FFEL (Federal Family Education Loans). The Act does not apply to private loans that are now owned by the U.S. Department of Education.

  • All interest on federal student loans will be waived from March 13th through September 30, 2020.

  • Payments on federal student loans are suspended for this same six-month period.

  • During this six-month period, the loan is frozen. This means that the balance will still be owed and is not a forgiven amount.

  • For the six-month period, each month will be counted toward loan forgiveness programs even if no payment is made.

  • Wage garnishment or other collection activities for loans in default will be paused during this six-month period.

  • Loans that are in a rehabilitation program due to missed payments will receive credit for payments during this period.

  • Workers who receive student loan repayment benefits from their employer can exclude $5,250 of employer contributions through December 31, 2020 from adjusted gross income.

What you need to do:

  1. Contact your student loan provider to verify that your payments and interest have been suspended.

  2. If possible, continue to make payments toward your student loans. This time provides a great opportunity to get ahead by paying down principal while interest is suspended.

  3. Make sure to coordinate with your loan provider to verify that your payment is being applied to your loan principle and not pre-paying your next payment.

Do you need a confidence boost?

Typically, you make one student loan payment and the service company applies that payment to your loans based on the loan terms. Since you can control how these extra payments are applied, consider what is going to help you get ahead the most. There are two approaches to applying your payments:

Snowball: This means that you apply your payments to the lowest balance first. You could try to pay off your lowest balance loan and feel great about checking that one off the list.

Avalanche: This means that you apply your payments to the highest interest first. By paying down principle on your highest interest loans you will save the most money in interest paid over the term of the loan.

Credit: Student Loans and the CARES Act, Fidelity Viewpoints, 4/24/20

Consider how “Stay at Home” has affected your finances.

If your employment and income have been negatively affected during this time, then the CARES Act provisions are meant to help ease your burden. If you have been able to maintain your income, then you still have an opportunity to tune up your cash flow and make sure you are putting money toward your goals. Now is a good time to review your essential expenses and cut costs wherever possible.

Review your spending over the last month while stay at home orders have been in place. Have you seen significant reductions in any spending that could help you apply more money toward your financial goals? Here are some expense categories areas that may have a falloff in spending right now:

  • Fuel

  • Dining out

  • Shopping

  • Travel

  • Hobbies/Activities

  • Personal Care (Massage, facials, etc.)

Take time to review and quantify how your cash flow has changed. I typically recommend putting 20% of your net income toward financial goals. If possible make a goal of putting a certain dollar amount to work each month toward your goals of debt payoff or savings.

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