Although the COVID-19 pandemic has affected most Americans financially, those contending with the weight of student loans have an additional burden on them. According to the Consumer Finance Protection Bureau, there is $1.7 billion outstanding in student loans from 45 million borrowers – or roughly one-sixth of the American population.
Despite the difficulties, there is a reason for significant hope. On March 11, 2021, President Joe Biden signed the American Rescue Plan Act of 2021 into law. While it fell short of forgiving federally-owned student loan debt, it did offer student borrowers a lot of resources and options for dealing with their obligations.
How can the American Rescue Plan help your debt? Depending on your situation, you could have a 0% interest rate on your loans, and may not have to make a payment until Sept. 30, 2021.
What does the American Rescue Plan do for student borrowers?
The American Rescue Plan is the “fifth phase” public assistance bill to be passed by Congress since the COVID-19 pandemic began. In addition to authorizing another economic stimulus payment to qualifying Americans, the law also extended relief measures for students and those holding federally-guaranteed student loans: Direct Loans, the Federal Family Education Loans (FFEL), and Perkins Loans.
$40 billion in student grants to help with financial needs
The law authorizes another $40 billion for the Higher Education Emergency Relief Fund (HEERF). Half of the money must go directly to students in the form of emergency financial aid grants, while administrators are encouraged to use the grants to discharge student debt. The money is designed to help students with exceptional financial needs, regardless of their status at the educational institution.
Student loans dropped to 0% interest through September 2021
Beyond the grants, the American Rescue Plan gives a reprieve for those who currently own student loans. The law reduced the interest rates on all loans held by the U.S. Department of Education to 0% through Sept. 30, 2021. The zero-interest period is retroactive through March 13, 2020.
Tax deferred on student loan forgiveness programs
In addition, all student loan forgiveness programs will be tax-free through 2025. This allows students who are pursuing an annulment of their debt through the Public Service Loan Forgiveness Program or other options to reduce their balance owed to the government and not owe taxes on the amount dropped as if it were income. Even though borrowers are not making payments on loans right now, the months will still count as if a payment was made if all other program requirements are met.
Catching up on student loans in default
The Education Department will suspend collection activity on anyone with a loan in default until at least Sept. 30, 2021. Although borrowers are not required to make payments, they may still have the opportunity to get out of default through loan rehabilitation or loan consolidation.
This portion is critical for the 1.14 million Americans who are currently in default on a privately-held FFEL loan, as they may be able to get caught up on their obligations. Those who remain in student loan default could face severe financial penalties, including difficulty signing up for utilities, getting a cell phone plan, or getting approved for housing.
How does the American Rescue Plan help those with federal student loans?
If you currently hold federal student loans through one of the three programs, you may not have to take action. The law automatically set currently active, delinquent, and defaulted federal student loans to 0% as of March 13, 2020. In the event you already made payments since then, you can request a refund of all student loan payments made from your student loan servicer. It’s important to ensure your student loan servicer has your most current address and phone number, in the event they need to send your correspondence.
Those who are able to make payments on their student loans are encouraged to continue making payments, as they will be directly applied to their loan principal. This could ultimately help you get a lower payment once the 0% payment period is over, or pay off your loans entirely without additional interest payments. Either route could save you a significant amount of money over time.
For the 1.4 million Americans who are currently in default on their federal student loans, there is additional hope. Beyond the paused collection actions, anyone who went into default on or after March 13, 2020, will be returned to good standing, giving them the chance to get caught up on their debt. As a result, over 800,000 individuals will be able to collect a full federal tax refund without the worry of having it seized to pay off the debt.
If you’re unsure of what type of loans you have, you can check using the National Student Loan Data System, accessible at studentaid.gov. The National Student Loan Data System is the central database of the Education Department, which keeps track of all student loans and grants.
Does the American Rescue Plan help borrowers with private student loans?
Unfortunately, the provisions for the American Rescue Plan do not extend to most private student loans held by commercial lenders. While there are exceptions for Federal Family Education Loans owned by commercial lenders and Perkins Loans owned by educational institutions, the majority of privately-held loans will not qualify for deference or 0% interest. Those who have private loans are encouraged to contact their lenders to see what options are available to them.
One good option for dealing with student loans is refinancing. Whether your goal is to refinance to get a lower interest rate or to consolidate balances to make one payment, refinancing student loans provides an avenue for relief. Anyone with a minimum of $5,000 in student loan debt from federal student loans, private student loans, or a combination of both, can refinance their balance.
Related: Pay Off Your Student Loans Once And For All – The Best Banks To Refinance Student Loan Debt
However, refinancing isn’t always an available option for everyone. If you don’t have a good credit score (700 or above), only one private student loan, or can’t afford your current student loan payment, you may not be the best candidate. In these situations, you may be able to negotiate a plan with your current lender to ensure you do not go into default.
If refinancing is the right option to help you get ahead on your student debt, your first step should be to shop around. Exploring rates and refinancing options with local and national banks, credit unions and loan marketplaces including Credible can help you find the rates and terms for your balance.
Using MU30’s student loan refinancing calculator may also help you simulate all your options based on your current situation, giving you control to understand how to reach your financial goals.Credible Credit Disclosure - To check the rates and terms you qualify for, Credible or our partner lender(s) conduct a soft credit pull that will not affect your credit score. However, when you apply for credit, your full credit report from one or more consumer reporting agencies will be requested, which is considered a hard credit pull and will affect your credit.
How to deal with student debt in the future
While there’s no way to know what the future will bring, understanding all of your options when it comes to your student loans can give you the upper hand in managing your personal finances. Knowing how long federal student loans are on pause can help you create a plan for the best ways to use your money – including paying down your student loan balances, getting caught up on credit cards and other bills, or putting money away for savings.
If you have private student loans, you still have an opportunity to request a reprieve. Either with a student loan refinancing, or through creating a budget, outlining your financial obligations to your student loan providers, and requesting reasonable assistance measures, it’s possible to get assistance on your balances due.
Every pathway to recovery starts with education. Learning about the current provisions and determining the best path forward can help you drive your financial life forward and grow your wealth.
The student loan benefits approved in the American Rescue Plan give those contending with educational debt a reprieve until the COVID-19 pandemic comes to an end. Under the plan:
- Student loan interest dropped to 0% and no payments through Sept. 30, 2021.
- Refund of payments made between March 19, 2020, and Sept. 30, 2021, upon request.
- Tax-free student loan forgiveness through 2025.
- Opportunities for those in student loan default to get caught up.
Before making a plan to take advantage of the new benefits, be sure you can afford to make additional payments. Through budgeting and smart spending, you can put yourself in the best position now and well into the recovery.