Written by: Mychal Eagleson, CFP®, AIF®, ChSNC® and Tom Farrer, CFP®, CRPC®
With the majority of us stuck at home, bombarded by the constant flow of information surrounding the Coronavirus, it’s become more difficult than ever to sort through it all and figure out the effects on your health and your wealth. We're not medical doctors, so we recommend you stick with the Centers for Disease Control's guidance and your doctor’s orders on the health side, but if there’s one place we can help out, it’s understanding the potential impact of this bill on your wealth.
So, in an effort to cut through the deluge of information, and speculation, surrounding the Coronavirus relief bill (CARES Act) that was signed into law last Friday, here’s a breakdown of the student loan provisions contained in the bill, how they affect you as a teacher, and some important things to consider.
Payment Suspension and Interest Waiver
First, despite what you may have seen on social media, here are the provisions contained in the bill, as well as, what may be even more important, what we currently don’t know about how they’ll be carried out.
- The bill suspends all payments due on certain federal student loans until September 30, 2020, and states that interest shall not accrue during this period.
What It Means for You:
1. If you have a loan that is currently owned by the US Department of Education, that is not already in default, it should be covered by these provisions. Generally, if your loan says “Direct” in front of the title, then it’s a federal loan.
2. Parent PLUS loans are eligible for this provision, as long as they meet the criteria above. So don’t forget to tell your parents if they don’t know this relief is available to them too.
3. If you have a Perkins loan or an older FFEL loan, your loan is not covered by these provisions. There’s one caveat, and that’s if you have a (rare) FFEL loan that was transferred to federal ownership.
4. If you have a Perkins loan or an older FFEL loan, your loan is not covered by these provisions. There’s one caveat, and that’s if you have a (rare) FFEL loan that was transferred to federal ownership.
5. In the coming days, the US Department of Education will be coordinating with the federal loan servicers to figure out exactly how these provisions will be implemented. The servicers are the companies you make your payments to each month. (i.e. FedLoans, Great Lakes, MOHELA, Navient, NelNet, etc.)
6. As of right now, we do not know how long it will take to enact these provisions across all the federal loan servicers or how they will go about implementing the changes. There are rumors that they will/have already stopped monthly payments and automatic deductions; however, those are not accurate as of this writing. Here's an example of this point from FedLoans, one of the nation's largest federal student loan serviciers.
7. Our thought, and we may be a bit too cynical here, is that they will likely end up enacting a “sign-up” type system. We can see it working like this:
1). If you’d like to suspend your payments, you log-in to your account online, tell them you’d like them to suspend your payments, and then they process that request.
2). You may have the choice to continue making payments, even though you aren’t required to, and if that’s the case, you won’t have to do anything.
We really find it difficult to imagine they will outright stop all payments, automatic or not.
8. Once these details are figured out, this presents a big planning opportunity for you. The key question will be, do you need the extra money from not making payments to survive, or do you have a cushion in your budget to use this as an opportunity to financially get ahead?
If the answer to that question is that you need it to survive, then the choice is obvious… make sure you get these next six months of payments suspended! But if you have the cushion, then take the opportunity to get ahead. A few good options to consider are:
1. Make sure you have an emergency fund of at least $1,000. If you’re already there, try and double it to $2,000 using the money you would have used to make your loan payments.
2. Start a Roth IRA. Generally, these are a fantastic choice for young teachers and those who are in one of the first three tax brackets (10%, 12%, 22%) for a variety of reasons. Plus, with the US stock market down 25% right now, you’ll likely be investing at an attractive entry point (buying low). You can check out the full details on Roth IRAs in a 2-minute video here: Why a Roth IRA is a Teacher's Best Financial Friend
3. Keep paying your student loans, even though you’re not required to do so. With interest being waived during this period, it means 100% of your payments will go toward paying down principal. Every dollar you pay, puts you closer than ever to paying off your student loans.
4. Do a combination of #1-3 or use the funds to pursue another financially beneficial endeavor. Whether that means having the money to use towards a will, donating some of the extra to your favorite charity or religious institution, or finally stocking up your vacation fund, you have six months’ worth of payments to make it happen.
Second, even with everything we’ve already covered, it’s important to circle back to private student loans, because you may have them.
- No specific provisions for private student loan relief are contained in the bill.
What It Means for You:
1. Unfortunately, these loans are NOT subject to the provisions of the CARES Act.
2. However, many of the servicers of private student loans have their own programs to help in times of distress. If you have one private loan or if all of yours are private, requesting a forbearance might be your best way forward. Interest will most likely continue to accrue (depends on your servicer), a forbearance will allow you to suspend payments for a certain period that you work out with them.
3. Please note, private student loans have different rules than federal student loans. By default, you have the right to request a forbearance on federal student loans, but this is not the case with private student loans. They may not offer a forbearance option at all, but if you’re in trouble, you should call and ask.
4. If you have private student loans and are doing fine, we strongly believe it’s not a good move to request a forbearance of your private student loan(s). In the meantime, though, this may be a perfect opportunity to re-evaluate your current servicer and loan terms, and if they still fit into your financial plan, or if you may simply be able to do better. (We can help you with this.)
Effects on Teacher Student Loan Forgiveness Programs
Thankfully, details were included in the bill to address two of the most important loan forgiveness programs for teachers.
- Time in payment suspension counts towards loan forgiveness or loan rehabilitation.
What It Means for You:
1. If you’re pursuing Public Service Loan Forgiveness (PSLF) as a teacher, you know it’s a tricky program to get right during “normal” times. The biggest part of this is making sure you accumulate 120 qualifying payments while following all the other rules of the program. With six months of potentially suspended payments, the question is, how will that affect my qualifying payment count.
2. The good news is that the CARES Act addresses this question, in the most opportunistic way possible. Basically, if you suspend six months of loan payments, those six months will still count toward your 120 qualifying payments, even though you’re technically not making payments.
In practical terms, I see a myriad of potential issues arising from this down the road, especially since the US Department of Education has tried everything they can to keep people from being approved for PSLF. If they don’t do their due diligence in documenting this in the master loan files of everyone who takes advantage of it, we’ll have big problems. However, if you need to suspend your loan payments to survive and are pursuing PSLF, likely your best bet will be to suspend your payments for six months, and deal with any potential issues later.
3. If you’re pursuing Teacher Loan Forgiveness (TLF), you’re covered under this act too. Since this program isn’t based on qualifying payments, but instead time spent teaching in low-income schools, the bill states that those teachers who are switched from full-time to part-time, will still have this year count as a year of full-time service for this program. The same is true for TEACH Grant recipients, but we don’t see that as much, so we're not going to go into further detail on it here.
4. If you’re pursuing Perkins Loan Cancellation, there are no provisions we have found in the bill that currently affect you, so our assumption is that this program will continue as usual, especially since Perkins Loans are not covered under the payment suspension or interest waiver.
5. From a planning standpoint, the credit of qualifying payments and good time counting are huge. If they’re going to provide these credits, then why not take advantage of suspending your payments now, and using that money to survive, or get ahead like we mentioned in the previous section. Six months’ worth of qualifying payments, without having to make actual payments, is a pretty good deal. It may come with a logistical headache after this is all said and done, or we may just be worried for nothing and the US Department of Education will get it right in the end.
Thanks for taking a few minutes to read up on the student loan provisions of the CARES Act and how they may affect you. We hope you're able to benefit from one or more of the items you've read and that you stay healthy and safe during this time. This is still an evolving situation and we plan to update this piece as more information becomes available, so please feel free to bookmark this article, check back for additional information, and share it with the teachers you think it might help.
Before you go, we’d value the opportunity to have a conversation with you to discuss your financial planning, how the provisions of this bill may affect you, and generally how you can make the most of your finances. Right now may be the best time to examine your situation and plan for what’s ahead.
Mychal Eagleson, CFP®, AIF®, ChSNC® is the President of An Exceptional Life Financial, an independent financial planning firm specializing in finance for teachers. His passion is helping teachers plan for successful financial futures and he frequently writes and speaks on important financial topics and how they specifically affect teachers' personal finances. He serves on the board of the Financial Planning Association of Greater Indiana as the President-Elect and Co-Director of Programming, serves as a member of the Professional Advisory Leadership Council for the Central Indiana Community Foundation, and is a proud member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network. To read more of the articles he's written or been quoted in through national publications, or to learn about An Exceptional Life Financial please visit: www.anexceptionallifefinancial.com.
Tom Farrer, CFP®, CRPC® is a Financial Planner with An Exceptional Life Financial, an independent financial planning firm specializing in finance for teachers. He served for six years as an executive at the Indiana Public Retirement System (INPRS), Indiana's largest pension plan and the one that specifically covers teachers' retirement. His passion for working with individuals one-on-one to achieve their goals motivated him to earn the CERTIFIED FINANCIAL PLANNER™ designation in late 2019, and join An Exceptional Life Financial in 2020. He's a proud member of the Financial Planning Association of Greater Indiana, the National Association of Personal Financial Advisors (NAPFA), and the XY Planning Network and serves on the board of the Shepherd's Center of Hamilton County.