On Friday, March 27, President Donald Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law. The $2.2 trillion emergency stimulus bill provides relief for American consumers, businesses and industries. It came as a surprise to many that included in the The CARES Act includes two provisions that directly impact student loan debt holders:
Section 3513: PAYMENT SUSPENSION
This provision allows student loan borrowers in repayment to defer payments, without interest or penalty, until September 30th, 2020.
- Most provisions apply only to Direct Loans and Federal Family Education Loans (FFEL loans)currently owned by the U.S. Department of Education (DOE).
- Private student loans, Perkins Loans and commercially held FFEL loans are not covered by the act.
- The law is retroactive back to March 13th, 2020. If any payments were made to a qualifying program after March 13th, you can contact your provider to request a refund.
- Payments set up on automatic debit are to be stopped by the provider with no action required by the borrower and the account will be placed into forbearance until September 30th, 2020.
- Borrowers will still get credit toward eligible Loan Forgiveness and Rehabilitation programs.
- A borrowers’ credit is not negatively impacted. The DOE reports to all credit bureaus as if payments were made and made on time.
- Involuntary collection of defaulted student loans, including wage garnishment and claiming of tax refunds, will also be suspended under the Cares Act.
- Beginning August 1, 2020, the Act requires the Secretary to give each borrower a notice at least six times, stating when the borrower’s normal payment obligations will resume and that the borrower has the option to enroll in income-driven repayment.
With the average monthly student loan payment over $357, the payment suspension provision puts a significant amount of money back into borrowers’ pockets to help cover other pressing needs during this time of global crisis.
While there are millions of borrowers who cannot afford to do so at this time, if you find yourself in a financial situation that allows you to continue making your monthly student loan payments, we strongly encourage you to take advantage of this interest free period that directs 100% of your payment to principal, reducing the balance for which future interest will be charged upon.
Another option for those who can still afford the payments is to accept the deferral opportunity and pay their student loan payment into an emergency fund. Most importantly, if you take the deferral opportunity, it is prudent to make sure you are putting that monthly student loan payment to work for you and not spending it carelessly.
Section 2206: EMPLOYER PROVIDED ASSISTANCE
This section of the Act gives companies the ability to help pay down their employees’ student debt without the payments being taxed.
- As part of an employer-sponsored educational assistance program, employers can make tax-exempt payments of up to $5,250 toward an employee’s student loan obligation through the end of 2020.
- The loan must be a qualified education incurred by the employee for the education of the employee.
- The employer may make the payment to the employee or to a lender.
- Contributions must be made to student loans by January 1st, 2021 for the contribution to be considered tax-exempt.
Employer-provided assistance programs have been a topic of discussion for many years. Making the employer-provided assistance under Section 2206 tax-exempt for the employer and tax-free to the employee could be a steppingstone to more concrete legislation in the future regarding employer sponsored programs centered around reducing student loan debt.
While it’s going to take some time for our economy to recover from the effects of COVID-19, the relief that millions of Americans will feel because of these provisions within The CARES Act will be immediate.