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Editor’s note: This post has been updated to reflect guidance from the Department of Education on implementation of the CARES Act.

Interest rates on federal student loans owned by the government have been reduced to 0% through Sept. 30, and loan servicers have been instructed to  place loans in administrative forbearance and stop collecting payments for six months.

The suspension of monthly payments and the interest waiver on federal student loans is automatic — you don’t have to apply  — and retroactive to March 13.

Borrowers who want to continue making payments on their federal student loans must contact their loan servicer to opt out of forbearance.

Any payments on student loans made between March 13 and Sept. 30 during the administrative forbearance period can be refunded by contacting your loan servicer.

As long as the interest waiver is in effect:

  • Borrowers experiencing economic hardship can put their monthly payments on hold for up to six months without getting deeper into debt.
  • Those who are able to continue making payments on their federal student loans will pay them down faster. Once you’ve paid any interest owed before March 13, all of your monthly payment will go toward paying down loan principal.

Managing monthly payments

Federal student loan borrowers who are having trouble making their monthly payments can seek relief by enrolling in an income-driven repayment plan, or applying for a deferment or forbearance.

An IDR plan can be more advantageous than forbearance, because some borrowers may eventually qualify for loan forgiveness after 10, 20, or 25 years of payments. If you’re already enrolled in an income-driven repayment program but have lost income because you’ve been laid off or had your hours cut, you can ask your loan servicer to recalculate your monthly payment.

During the temporary relief period ending Sept. 30, borrowers who have had their monthly payments suspended will still get credit toward loan forgiveness or loan rehabilitation. Also, loan servicers are being instructed not to report borrowers to credit bureaus as delinquent if their payments have been suspended.

The Department of Education is also suspending “involuntary collection” on defaulted loans, and will refrain from garnishing wages, tax returns or social security checks through Sept. 30.

Some loans don’t qualify

Student loans issued by private lenders and state student loan authorities are not covered by the new measures. Some Perkins and FFELP loans are held by the government, and qualify for the payment and interest waivers.

But Perkins loans made by schools are not federally held, and don’t qualify. Neither do roughly $142.4 billion in Federal Family Education Loan program (FFELP) loans that are owned by private lenders.

However, borrowers may consolidate FFELP or Perkins loans not owned by the government into a federal Direct Consolidation Loan, which would be eligible for the interest waiver.

The six-month break on payments and interest for federally-held student loans is part of legislation approved by Congress to address the economic impacts of the COVID-19 pandemic.

On March 20, the Department of Education announced it would reduce interest rates on federally-held student loans to 0% and let borrowers stop making payments for at least 60 days, retroactive to March 13.

Congress then extended the interest waiver to six months, giving borrowers the right to stop making payments on federally-held loans through Sept. 30 without interest on their balances accruing.

Student loan refinancing

Federal student loans provide borrower protections that can be important during times of economic uncertainty, including access to income-driven repayment plans and the right to place loans in deferment or forbearance in some situations. Borrowers refinancing federal student loans with private lenders lose access to these programs.

However, incentives remain for refinancing private student loans at rates that are low by historical standards. Incentives to refinance include:

  • Reducing monthly student loan payments by extending the loan term
  • Reducing total repayment costs by refinancing at a lower interest rate
  • Locking in a fixed interest rate by refinancing a variable-rate loan with a fixed-rate loan.

If the interest waiver on federally-held loans expires as scheduled on Sept. 30, many parents, professionals and postgraduate degree holders repaying high-interest federal PLUS loans will again have incentives to refinance.

About the author
Matt Carter
Matt Carter

Matt Carter is a Credible expert on student loans. Analysis pieces he’s contributed to have been featured by CNBC, CNN Money, USA Today, The New York Times, The Wall Street Journal and The Washington Post.

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