Student-Loan Payment Suspension: What Trump’s Executive Action Means for Borrowers

[The Wallstreet Journal, Reuters]

Here’s what to expect as the Sept. 30 expiration of loan relief approaches

In March, Congress passed a law that gave most of the borrowers in the $1.5 trillion market for federal student debt a six-month interruption of monthly loan payments and interest accruals.

With the Sept. 30 expiration of that relief looming, President Trump signed an executive action Aug. 8 that continues the moratorium on monthly payments through the end of the year.

The order directs Education Secretary Betsy DeVos to let borrowers temporarily suspend those payments on the grounds of economic hardship. But unless the Education Department overrides some of the rules that normally govern economic hardship deferments, some types of loans may not qualify for an interest freeze after Sept. 30, and some borrowers could be denied relief altogether the last three months of the year.

Here is what to expect.

Q: Some say President Trump lacks the legal authority to do this. Can borrowers count on payment relief continuing until Dec. 31?

Very likely, yes. The White House contends that Section 432 of the Higher Education Act gives the education secretary “broad authority” to act.

In addition, the continued suspension has bipartisan support, said Mark Kantrowitz, vice president of research at Savingforcollege.com. As a result, he said, it’s unlikely that anyone will file a court challenge.

Many believe Congress, which remains divided on matters including unemployment insurance, will eventually pass a broad relief package that would supplant the executive order and extend the terms of the current relief package for most federal student loan borrowers through Dec. 31 or beyond.

Q: What kind of loans and borrowers are eligible?

There are two basic types of student loans: federal and private.

Federal loans, including Stafford, Grad PLUS, Parent PLUS and consolidation loans, comprise more than 90% of student loans outstanding and are eligible for the payment suspension, provided they are owned by the U.S. Education Department.

Some federal loans issued under the ⁰ which was discontinued in 2010, are owned by entities aside from the Education Department, including commercial lenders. Borrowers with these loans can’t take advantage of the suspension unless they consolidate their loans into a new loan, a step that isn’t always beneficial.

At a press conference from his golf club in Bedminster, N.J., Saturday, President Trump issued executive orders to provide payroll tax cuts, impose a partial eviction moratorium, expand unemployment benefits and assist with student-loan payments.

Q: Which borrowers may not be able to use the new suspension?

Many believe the Education Department will issue guidance that would allow virtually all borrowers with federal student loans owned by the department to take advantage of the payment suspension from Oct. 1 to Dec. 31.

Otherwise, Mr. Kantrowitz said, loan servicers may prevent borrowers who have already used the three years of economic hardship deferment permitted from taking the extra three months of payment relief.

The same would be true for borrowers in school or who have defaulted, groups for whom economic hardship deferrals are normally off limits.

Borrowers in rehabilitation—a one-time chance to remove a default from a borrower’s credit report in return for making nine on-time payments over 10 months—have been able to count payments paused from March 13 to Sept. 30 toward the nine required. But Mr. Kantrowitz said under the executive order, they may not be able to continue that practice.

A representative for the Education Department said, “We are reviewing the presidential memorandum and will implement it quickly to help support students impacted by the virus.”

Q: Does the executive order suspend both payments and interest accruals?

While the rules that normally govern hardship deferments freeze interest accruals only on some types of loans, the presidential memorandum directs the education secretary to suspend payments and stop the accrual of interest on all federal loans held by the Education Department.

Q: What must I do to get my repayments suspended?

Scott Buchanan, executive director of the Student Loan Servicing Alliance, a nonprofit that represents the companies that collect payments on student loans, expects the extended suspension of payments on federally held loans to be automatic, but is waiting for guidance from the Education Department.

Q: If I can afford to make monthly payments during the suspension period, should I?

It depends. If you have credit card or other debt with a higher interest rate or lack an emergency fund, put your student loans on pause and use the money for those purposes instead, said Heather Jarvis, a lawyer who teaches financial professionals about student loans.

Otherwise, if “you are secure in your job and have no expectation that you would benefit from a loan forgiveness program, you might do well to make payments during this time,” she said.

That’s because unless you have accrued unpaid interest, all of the payments you make during this period will be applied to your loan’s principal, allowing you to repay the debt faster.

If you have multiple student loans, channel payments to the one with the highest interest rate.

Q: I have federal loans that don’t qualify. Can I get help?

If you have subsidized Stafford loans that aren’t owned by the Education Department and you are unemployed or experiencing economic hardship, you can request a deferment. This suspends monthly payments and stops additional interest from accruing. Otherwise, you can request a forbearance, which suspends the payments but lets the interest continue to build.

If you have more than one loan, you can combine them into a consolidation loan, which qualifies for the payment suspension and interest freeze. But you will lose any interest-rate reductions you earned for making on-time or automatic payments and if you are in a loan-forgiveness program, consolidating might reset the clock on the 10 to 25 years of payments required before the balance can be canceled, said Mr. Kantrowitz.

Q: I am in a loan-forgiveness program. Will my payments be suspended?

For borrowers in income-driven repayment plans—which cap student-loan payments at a portion of a borrower’s annual discretionary income—the three paused payments will count toward loan forgiveness after 20 or 25 years.

But for people in the federal government’s Public Service Loan Forgiveness program, it’s unclear whether payments suspended under the executive order can be applied to the 120 payments required before the balance can be forgiven, said Ms. Jarvis.

These borrowers can take advantage of the payment pause. But they may have to tack three payments onto the end of their loans to compensate.

By Anne Tergesen