A guide to help your employees better respond to financial stress in light of COVID 19. Printable Version
President Trump announced interest forgiveness on student loans. Below are a few topics to help shed light on the announcement and what employees can do instead.
1. Trump’s proposal waives interest payments but payments are still due.
2. Most federal loans qualify for interest forgiveness.
3. Should you refinance since rates are low?
4. Isn’t interest the only thing I get to write off on my taxes- how does this help me?
5. Servicers will not be able to implement this in the time borrowers need help
6. FINALLY - What should you do now if you need lower payments?
Trump’s proposal waives interest payments but payments are still due
According to the Department of Education, student loan interest stops accruing on federal loans for an undetermined amount of time. This includes loans in forbearance and for those still in school. This does NOT mean your payment stops.
Advocacy groups wanted a freeze on all payments and continue to count payments towards loan forgiveness. However instead, Trump stopped payments on the portion that is the student loan interest only. By having people continually make student loan payments on the loan principal amount, public servants can still use payments to count towards the 120 payments they have to make in order to get their loans forgiven. You may also benefit from this by filing into a plan that is based on your income. More on this in the last section.
If you are aggressively paying off your student loans and or you do not have large interest accrual on your loans, this announcement makes a very small difference in your monthly payment.
Most federal loans qualify for interest forgiveness
Most federal loan borrowers qualify for the President's interest freeze.
The types of loans specifically that qualify for interest forgiveness include:
Direct Stafford Subsidized
Direct Stafford Unsubsidized
Direct Grad PLUS
Direct Parent PLUS
Federally Held FFEL (Federal Family Education Loan)
Federally Held Perkins
Private banks hold FFEL and Perkins loans and as a result they will not receive interest subsidy. Private student loans do not qualify for a subsidy or interest forgiveness.
Should you refinance since rates are low?
Refinancing is not the right solution if you are a nonprofit or government employee and qualify for the public service loan forgiveness program (PSLF).
If you are not working towards PSLF, the value of the interest savings from Trump’s announcement could outweigh refinancing right now. However, the execution and ability for servicers to properly calculate the interest subsidy for each borrower accurately is unlikely. This will be a pain to deal with and we have no idea the benefit of the interest savings since this announcement was made for an unforeseen amount of time.
Considering the circumstances, refinancing is the right decision if you believe the interest freeze will only be for a short period of time, the interest rates will increase significantly in the future, and you don’t want to deal with your servicer. Obviously, refinance is right only if you continue to have a steady income and the ability to pay off your loans.
However, if your income and job stability is not great, I don’t recommend refinancing. Private lenders can pause payments for up to 90 days and you will never qualify for zero dollar payments and ultimate forgiveness if you lost your job. These are economically precarious times and it may be best to err on the side of caution.
Isn’t interest the only thing I get to write off on my taxes- how does this help me?
It’s true you get to write off $2500 of your taxes if your adjusted gross income is less than $85,000 (filing single) and $170,000 if you are married filing jointly. This means you'll have less to write off in 2021.