Student loan borrowers who have worried about what’s going to happen after the CARES Act student loans benefit ends at the end of September 2020 now have something to be happy about.
On August 8, President Trump signed a memorandum ordering the U.S. Department of Education to extend the CARES Act student loans benefit — that includes pausing payments and charging no interest — until 2021.
But while many borrowers can take advantage of the continued student loan freeze, not all are eligible based on the type of loans they have.
Here’s how to find out if you qualify for the 2021 student loan pause and what your alternatives are if you don’t.
Which student loans are included in the federal student loan pause?
In late August, Department of Education Secretary Betsy DeVos implemented several student loan relief measures, which are currently valid through December 31, 2020.
- No federal student loan payments.
- There will also be a student loan interest pause on federal student loans.
- No garnishments of wages, Social Security benefits or tax refunds to pay student loan debt in default.
- Non-payments during the student loan pause period count toward Public Service Loan Forgiveness progress.
All of these measures were included in the original CARES Act student loans benefit, so those who haven’t had to make student loan payments under that provision since earlier this year can enjoy the same benefits until 2021.
But while the CARES Act states that the relief applies to federal student loans, it’s important to note that not all federal loans qualify.
More specifically, only loans owned by the Department of Education are eligible. That includes Direct Loans, but not Perkins Loans, which are owned by colleges, or Federal Family Education Loan Program (FFELP) loans that were issued by private lenders prior to 2010.
As you might guess, private student loans are also ineligible because the federal government doesn’t have any ownership over the debt.
According to The Institute for College Access & Success, 12% of federal student loans (in terms of dollars) do not qualify for the 2020 student loan freeze. A good way to tell if your loan are eligible is to consider whether you’ve been required to make payments over the last several months since the CARES Act went into effect.
If you benefited from that student loan pause, you’ll automatically continue to do so. If not, you still won’t be covered.
What to do if you don’t qualify for the 2021 student loan freeze
If you have loans that aren’t covered under the CARES Act or its extension, you may be wondering how to lower student loan payments or how to skip payments altogether. Depending on your situation, here are some things to consider.
Ask for deferment or forbearance
Both federal and private lenders typically offer some form of deferment or forbearance for borrowers who are experiencing financial hardship. If your need for relief is clear, you may be able to get a pause on your student loan payments for a short period, which can vary from lender to lender.
Keep in mind, though, that this kind of payment pause isn’t the same as what the Department of Education offers its borrowers. Instead, interest will still accrue on your loans while you’re not making payments, and if you’re not making interest-only payments, it will capitalize once the deferment or forbearance period is over.
This means that the interest that accrued during the pause period will be added to your principal balance.
Get on a federal income-driven repayment plan
If you have federal student loans and have the option to get on an income-driven repayment plan, it can be a great way to lower student loan payments.
That’s because income-driven repayment plans calculate your income based on a percentage — between 10% and 20% — of your discretionary income. Depending on how much you’re making, you could reduce your monthly payment significantly.
Note, however, that these payment plans also extend your repayment term to up to 25 years, which means you’ll ultimately spend more on interest than you would if you stuck to your current payment schedule.
Refinance your student loans with a private lender
If you’re wondering how to lower student loan interest and your monthly payments, student loan refinancing may be a solid option.
Whether you have federal student loans, private student loans, or both, it’s possible to refinance them. Refinancing involves replacing your existing loans with a new one from a private lender.
Depending on your credit history and money situation, you may be able to score a lower interest rate than what you’re paying now.
Not only would that save you money on interest charges but it’ll also reduce your monthly payment if you keep the same repayment term.
You can even choose a longer repayment term, which could further reduce your monthly payment. But again, extending your repayment term will result in higher interest charges over the life of the loan.
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Which student loan repayment option is right for you?
If you’re struggling with your student loan payments because you’ve lost your source of income or your hours have been reduced significantly during Covid, refinancing them may not be an option unless you can get a creditworthy cosigner to apply with you.
Otherwise, you may be better off asking for assistance through deferment or forbearance, or by getting on an income-driven repayment plan (federal loans only).
If, however, your income is still relatively stable and your credit history is strong — or, again, if you have a creditworthy cosigner — student loan refinancing may be the best option on the table.
If you’re considering that route, take your time to shop around and compare rates from several lenders. With the Purefy Compare Rates tool, you can do this with several lenders all in one place quickly and easily.
With these rate quotes in mind, you’ll have a better understanding of what you qualify for and whether it’s the right move for you. In addition to the rates, also consider the repayment terms, monthly payments, and other features that could be valuable to you as you work to pay off your student loan debt.