College borrowers aren't always seeing COVID-19 relief. Here's why
When you know a tiny bit about something, you can walk around in a fog that throws your finances for a total loop.
So begins the story on coronavirus relief efforts and student loan debt.
Increasingly, consumer advocates report hearing from student loan borrowers who haven't paid a dime on their college loans since March and believe that they're in perfectly fine shape. They've heard about all the student loan breaks that run through the end of December.
And the big money tripwire?
Tucked in their basket of debt, they're dealing with a hot mess of student loans that aren't covered by coronavirus-related debt relief.
A metro Detroit consumer was shocked after unpaid student debt suddenly popped up on her credit report, according to Sue Stoddard, housing counselor and family self-sufficiency resource coordinator for the Wayne Metropolitan Community Action Agency.
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Stoddard, a financial coach for the borrower, had to explain that more than $13,000 of student loan debt was reported as past due – indicating that those specific loans weren't covered by special forbearance programs.
The borrower needed to make monthly payments on those loans but stopped because of misconceptions about what was and wasn't covered under COVID-19 debt relief.
The borrower didn't realize that the temporary 0% rates and automatic pause in payments applied only to specific federal student loan debt, not all student loans.
About 9 million borrowers – those with private student loans and those with most Perkins loans and Federal Family Education Loans that are not owned by the federal government – do not receive automatic relief, according to the Student Borrower Protection Center, a nonprofit advocacy group.
"With private student loans, a borrower has to request forbearance. It is not automatic. Even the special 90-day COVID-19 forbearance has to be requested," said Mark Kantrowitz, publisher and vice president of research for Savingforcollege.com.
Many experts recommend contacting a loan servicer if you’re having trouble making your payments or if you're unclear about whether your loans are covered under the federal Coronavirus Aid, Relief and Economic Security Act or other programs.
Mishaps can trigger trouble down the road – and servicers will try to get their money. For example, a private student loan creditor with court approval is entitled to 100% of a debtor's state tax refund.
For private student loans, tax refund garnishment is available only at the state level and does not apply to federal tax refunds.
"While they can't seize your federal refund, they can take action to collect quicker than federal student loan servicers," Stoddard said. "Federal servicers are unable to take collection action until a loan is 270 days past due, private servicers can take action as soon as you're late once."
The private servicer can go to court and sue to garnish wages, seize money in bank accounts and take a state tax refund, according to student loan experts.
"Lawsuits are the main collection tool for delinquent private student loans," Stoddard said.
If you have federal student loans in default, your federal income tax refund can be offset to cover the debt. (For information about offsets, you can call the U.S. Treasury offset program call center at 800-304-3107.)
Having delinquent student debt or debt in default will damage your credit score – and drive up the interest rates if you take out a car loan or mortgage.
Federal collections on defaulted federal student loans have been suspended through the end of the year. Remember, though, these loans are deferred, not forgiven. People need to craft a plan to begin repaying their debt in 2021.
Why must student loan be paid?
If you're confused, well, that's just part of waking up every day in 2020, isn't it?
"We did see that many borrowers were confused about which loans qualified and which did not," said Will Sealy, co-founder and chief executive of Summer, which helps borrowers track their student loans and identify the best repayment options.
Sealy noted that some servicers voluntarily gave borrowers with commercially held Federal Family Education Loans a 90-day forbearance during which the interest still accrued. Though helpful, the break often perplexed borrowers because 0% interest relief was offered on other federal student loans covered under the Coronavirus Aid, Relief and Economic Security Act.
Some borrowers opt to consolidate older FFEL not covered to get relief under the COVID-19 forbearance policy. That isn't wise for everyone because some protections are lost by consolidating.
"Any borrower who is unable to make their loan payments on the commercially held federal loans may consider enrolling their loan in an Income-Driven Repayment plan. If they're currently earning less than $20,000, the borrower will likely qualify for a monthly payment of $0," Sealy said.
Summer has an online tool that all borrowers can access to determine which federal loans qualify for relief and which do not. See www.meetsummer.org/covidrelief.
Wayne Metro offers a Student Loan Webinar monthly that is free to attend. For more information, go to www.waynemetro.org.
What should student loan borrowers do?
The first step to spotting trouble is to request a free copy of your credit report at www.annualcreditreport.com to see whether any student loans show late payments. Free weekly online reports are offered through April 2021.
You might see those unpaid loans show up as past due, delinquent or listed in collections. Review the credit reports for Experian, Equifax and TransUnion.
You would not see late payments for federal student debt covered by COVID-19 relief. The federal student loan account status would show as current or pays-as-agreed.
"If you do not make payments on your private student loans for 120 days and are not in an authorized forbearance, your loans will go into default," Kantrowitz said.
Anecdotally, Kantrowitz said, he's heard of a few private student loan lenders that may automatically put borrowers who have not made payments since March into a forbearance program, rather than have their private student loans go into default.
You are at the mercy of your lender, but it's wise to reach out, even if you're behind because you didn't understand the rules.
Unfortunately, borrowers cannot tap into a central database to locate private student loan debt. One can go to studentaid.gov to access information about federal loans.
Kantrowitz suggested that borrowers contact the financial aid office of the college they attended, which might have information about private student loans.
Many times, students sign the paperwork in front of them when they take out loans in college, and they don't realize all student loans aren't the same. Such distinctions are essential to understand in 2020 when nothing is simple.