Student Loan Forgiveness & the CARES Act

The CARES Act has been a modest help in numerous ways to several people and businesses, and student loans happen to be one of those things. There are some catches, this is true, and the decision on how to best take advantage is not a one stop answer. A fair amount of different life circumstances will need to be weighed in for you to make the best decision for your best financial health.

  • To the big important statement – between March 13, 2020 and September 30, 2020 federal student loans have been placed on pause. The payments themselves are on pause, and the interest rate has been changed to 0% for the same duration.

One primary resource for you will be https://studentaid.gov/ , always be careful when doing research online. Many websites will offer their interpretation of how things are, but finding source material on .gov websites is always the most reliable source of information. It is generally produced by the very people actually doing the work involved. This site has (at the time of writing) a nice blue banner at the top where one can click and get additional information about the special rules the apply to them immediately.

  • For most folks who qualify for help with their student loans under the CARES Act, it is automatically applied to you with no action required.

How do I know if I qualify for student loan forgiveness?

To find out if you qualify for student loan forgiveness you need to determine if your student loan is a federal student loan. All the help in regard to the CARES act hinges on this. Generally speaking, if your tax form is issued each year by the Department of Education, you qualify.

It is possible that you can receive some assistance if your loan is not a federal student loan, but it would require you reaching out directly to your lender and asking for aid due to your circumstances. This is true regardless of the coronavirus situation though.

Should I pay my student loans or wait?

Once you have determined if your loan is a federal student loan, you have an important choice to make: do you make your payments or not? The intent was for all automatic payments to be paused whether you wanted them to be paused or not, that is what was supposed to happen.

  • Option A is clearly, do nothing. Your next payment won’t happen until October, please plan accordingly for that month – in the meantime, you have that much extra to make ends meet.
  • Option B is to continue making your payments as you have. Let us be clear – this is NOT required and you will not hurt your loan / credit / leprechauns / unicorns / or Santa by not making your payment. If your financial circumstances are still very similar to pre-coronavirus quarantines / lockdowns / and stir crazy extroverts who were cooped up too long and are just going crazy outside… then it could be advantageous to help eliminate some of your student loans faster

Should You Take Advantage of 0% Interest?

I’ll explain: the magic is in the 0% interest for the time allotted. What that means is that your payment will go directly to principle. Usually your payment is split between a portion going toward principal and the other toward interest. It is like making an ‘extra’ payment to pay off your loan faster, but instead of having to come out of pocket for extra, you just make your same normal payment and it accomplishes the same task – which is just great!

  • If your loan is a federal student loan, and your payments were not automatically paused, you can in fact request a refund of the payments made during the window of time. You will need to contact your loan officer to request the refund.

Not everyone will be in a position to take advantage of this benefit, and that is not a bad thing. The suspension of your requirement to pay for a few months isn’t going to make or break your financial health during this outbreak – but every little bit helps.

There are some of you out there that are taking part in something called ‘public service loan forgiveness’ or PSLF – essentially work ‘x’ amount of years with qualified employers and make your payments during that time, once the time is up – your loans are forgiven. A fantastic program. The question is in regards to making your payments, as you don’t want to mess up that program and be obligated to pay on those loans forever. The months that you do not have to pay – still count as you having paid them! So for you wonderful folks – don’t make those payments! To double check the PSLF waiver the CARES act provides – our trusty studentaid.gov website is your source of confirmation!

A Caution for Everyone

The CARES act is providing a lot of help and assistance for many people. It is also providing bad guys with lots of opportunity to scam, swindle, and be evil. Please double check websites you visit for security, be cautious in providing your personal information in emails, phone calls, etc. If there is some terribly urgent call that just can’t wait… it is a lie. Hang up, call your lender directly yourself with a number you already have, or by finding their legitimate website online and asking about the hyper, urgent call.

Tax Time Benefits

As a side note, the interest paid on student loans can be a tax write off. First, you have to have legal obligation to the loan, paying on or paying off a loan you didn’t sign or cosign won’t net you any tax benefit. The deduction is subject to a limitation based on total income and won’t always show up as a deduction on your tax return. It is always complicated to tell you that your deduction is a valid deduction but not for you because you make ‘too much’.

There is one additional catch with student loan interest. Even if your income is below the threshold to qualify you for the deduction, there is also a max amount of $2,500.00 in interest that can be claimed per year. It must be deducted in the year it is paid, no holding it over or carrying the excess to follow years. For tax prep, just make sure you have your Form 1099-E and you are good to go. It is normally mailed to you unless you elected for paperless. If you elected paperless you would need to go online and print the tax form.

How We Can Help You

Molen & Associates is not affiliated with any student loan agencies and while we will offer what knowledge we have, we are no means experts in student loans. While we are not experts on the fine points regarding all student loan questions, we did a tremendous amount of research in regards to the CARES act.  This article has supplemental information for those of you awesome enough to be doing your homework (research). We are, however, experts in matters of tax and helping you unravel your tax headaches is what we do best. We have a passion for helping you build your whole financial vision, savings $300.00 in tax is a bad choice when it is going to cost you $2,000.00 to do so. Molen & Associates offers tax planning and consult appointments, family finance appointments, in addition to tax preparation and are always accepting new clients!

Charles Steinmetz
Senior Tax Advisor

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