Please ensure Javascript is enabled for purposes of website accessibility

Tag: cares act

How to handle your student loans during the pandemic

The U.S. economy is struggling to get back on track amid a global health crisis that’s left millions of Americans without work. The result is a dire financial situation for many that has created great difficulty in making debt payments. In response, the federal government has added more benefits for student loan borrowers. Now, individuals with federal student loan debt will be given a break.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27, 2020. While the goal of the CARES Act is to provide relief to Americans during this pandemic, it’s also given rise to many questions about how this act will help individuals and communities in time of need, especially when it pertains to ongoing debt payments such as student loans.

If you have student loans and find yourself needing assistance due to the coronavirus, the U.S. Department of Education is giving most federal student loan borrowers a break in their monthly payments. According to the Federal Reserve, students have racked up $1.41 trillion dollars of student loan debt outstanding in the U.S. In 2019, before the pandemic, more than 10% of that debt was at least 90 days past due or already in default. Below are some tips to navigate the new guidelines and understand the qualifications.

How does the CARES Act help with student loans?   

There are many types of student loans and only some qualify for coronavirus forbearance. Those that qualify are suspended, interest-free, from March 13, 2020 through September 30, 2020.

To determine if you qualify, you will need to know what type of student loan you have and who the lender is. If your loan is either provided or guaranteed through the Department of Education, there are two key incentives:

  • Zero interest loan deferral from March until September. Note, however, that this only applies to direct loans, Perkins loans, which are owned by your college or higher education institution, and Federal Family Education Loans (FFEL) provided through or guaranteed by the Department of Education.
  • Your non-payments could still count as if you’ll be making the payments monthly, but only if you are seeking loan forgiveness under the Public Service Loan Forgiveness Program or through the Income Drive Repayment.

If you have a private loan not provided through or guaranteed through the Department of Education, you’re more than likely still responsible for your monthly interest and principal payment. According to the Institute for College Access & Success, nearly 12% of federal loans don’t qualify under the terms of the CARES Act. If this is the case for you, then you should reach out to your lender and inquire about the payment or what they’re possibly doing to help borrowers during this time.

If you do have federally funded student loans, that means your payments are suspended through September 30 and those suspended payments count toward forgiveness programs. Your federal loan provider will suspend payments for you without any action on your end.

What are student loan borrower’s options right now if they can’t make payments?

If you’re one of many million Americans being affected by lower or loss of wages, you’ll want to take advantage of the provisions provided in the CARES Act and start back up your monthly principal and interest payments in October 2020. Interest will not accrue until October and if you can’t make payments right now, it won’t affect your credit score.

If you’re not impacted by loss of salary and are able to make your payment, it’s still possible to take advantage during this time. Any funds you apply toward your student loan from March 2020 and September 2020 will be treated as a principal reduction. This means that in October 2020, the interest charged will be against the outstanding principal at that time, which in turn will reflect a lower interest charge and reduce your monthly payment.

If you have commercially held FFEL or Perkins loans, you are not covered by the same benefits as federally funded loans. You do still have some options, however. With FFEL, you can apply for up to three months of disaster forbearance. This means your payments will be suspended while your loans stay in good standing and it won’t affect your credit. However, you will still accrue interest during those three months.

How can the CARES Act, stimulus money & relief efforts help borrowers?

If you have privately funded student loans and won’t get relief from the federal government, the CARES Act is also incentivizing employers to help pay off student debt. Employers are now allowed to make tax-free payments of up to $5,250 in 2020 toward their employees’ student loan payments. Reach out to your employer to set up this repayment assistance.

While the CARES Act and stimulus money should bring some relief to individuals right now, Americans are still concerned for their own long-term well-being, as well as that of their family. One way to become more financially secure, especially once conditions are more stable, is saving more and dedicating to fully funding an emergency fund.

Consider putting additional funds into a savings vehicle that will put you in a more comfortable position should the pandemic show itself again toward the end of the year or in preparation for a future unexpected event. We have seen the financial realities for many change overnight and this is even more reason to better prepare and save for the unexpected however possible.

Accessing retirement accounts in a time of uncertainty

Americans entered the year with a great economy, low unemployment, and anticipation of continued economic success.  The unemployment rate reached lows not seen in decades and Americans were feeling confident. As Valentine’s Day approached, rumors of a virus in China started to hit mainstream media.  Shortly after, the market started to decline, and the first case of COVID-19 was confirmed in the United States.

As the Coronavirus spread, stay-at-home orders were put into place, the stock market crashed, and weekly unemployment claims spiked to record highs. With unemployment in double-digits, and layoffs surly to follow into the summer, Americans are scared.  For those unemployed, there are still obligations to pay.

As fear gripped Americans, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).  This bill provided checks to Americans under certain income limits along with help to small business owners.  The CARES Act also altered the distributions rules to make it easier for people impacted by COVID-19 to access retirement accounts. In a time of uncertainty, knowledge will help guide important decisions of many Americans faced with tough decisions. As Plato said, “Human Behavior flows from three main sources: desire, emotion, and knowledge.”

Standard rules

Previously, investors taking money out of retirement accounts (401(k)s, IRAs, 403(b)s, ect.) prior to age 59 and a half would face ordinary income tax, along with a 10% tax penalty on the amount of withdrawal in the year of the distribution. Within an Individual Retirement Account (IRA), there were a few limited exceptions to the 10% tax penalty including first time home purchase, higher education expenses and disability — to name a few.  Most 401(k) accounts are only available for withdrawal after separation from service.  A loan may be available from a 401(k) account whether still employed or no longer working, up to $50,000 or 50% of the accumulation, whichever is less.

Eligibility for relaxed rules

Under the CARES Act, distribution rules were changed in favor of investors impacted by COVID-19 to make it easier to access retirement accounts with a lower tax burden.  To qualify for the relaxed rules, qualified participants must demonstrate they were diagnosed with coronavirus, had a spouse or dependent diagnosed, or experienced a layoff, furlough, reduction in hours, or were unable to work due to COVID-19, or experienced a lack of childcare because of the virus. Without a valid COVID-19 related reason, the standard rules will apply.

CARES Act relaxed distribution rules

Under the CARES Act, Americans who qualify can take up to $100,000 out of eligible retirement accounts in 2020 without paying a 10% early withdrawal penalty. The act also suspends a mandatory 20% withholding that usually applies to distributions from employer sponsored retirement accounts. Investors will still owe ordinary income on IRA distributions, but a great amount of flexibility is given to manage the tax liability.

Ordinary income taxes from the distribution can be spread over a three-year period or can be paid in 2020 if income will be lower due to a furlough or layoff.  The CARES Act also gives individuals to three years to pay the money back into a retirement account so the distribution would not be taxable compared to just 60 days under the standard rules.

The available loan amounts, if available, have doubled to $100,000 or up to 100% of the vested balance in 401(k)s.

Should I rollover my 401(k) to an IRA?

For employees that have been let go, a decision must be made to leave money in a previous employer’s 401(k) or complete a rollover to an IRA. A 401(k) may provide the advantage of a loan option not given by an IRA but rolling to an IRA has several advantages.

An IRA allows investors to choose where they would like to invest their retirement account.  This means investors can choose a low-cost investment company which often have lower fees or a professional asset manager. An IRA will typically provide investors with greater fund options with lesser transactional paperwork. Each investor is different and should consult professionals to help make this decision.

Knowledge in power

In the face of fear and uncertainty, crucial decisions must be made based on facts and changing rules.  The CARES Act relaxes the rules to help Americans who qualify use retirement accounts through the pandemic. With more options, smart decisions based on investment and tax law will save money and ease the anxiety of many Americans without employment.