Optimizing Your Loan Payments with the Interest Waiver

On March 31st, the Coronavirus Aid, Relief, and Economic Security (CARES) Act confirmed the President’s earlier announcement that interest would be waived on federally held student loans through September 30th. The new legislation also paused all required monthly payments on federally held student loans through the end of September.

While many borrowers with reduced income will not have to make student loan payments during this difficult time, the changes also present opportunities for those fortunate enough to have a stable income.

If you’re not working toward any loan forgiveness programs and are attempting to pay off your loans more quickly, here are a few ways you can make the most of your payments while the interest waiver is in effect.

 

Find out what types of federal loans you hold.

The interest waiver will apply to all “federally held” loans—so what does that mean exactly? There are several different types of federal loans, and the interest waiver will apply to some loans but not others. We’ll break them down below. If you’re not sure what type(s) of federal student loans you have, you can use Summer’s loan sync feature, or log in to your account with Federal Student Aid.

Direct loans are the newest type of federal student loan. If you took out your student loans after 2010 and borrowed from the government through your school, you likely have Direct loans. They are federally held and will be eligible for the interest waiver. If you have Direct loans, you could:

  • Continue to make your normal monthly payments. The payments will go toward principal rather than interest, reducing the total amount you’ll pay over the lifetime of your loan.
  • You also have the option of requesting a temporary deferment or forbearance from your loan servicer so that you can stop making payments while your interest isn’t growing. These extra funds could then go towards other debt (like credit cards or private loans) or to an emergency savings fund.

Federal Family Education Loans (FFEL) and Perkins loans are older types of federal loans. They will only be eligible for the interest waiver if they’re federally held, and unfortunately most of them aren’t. If your FFEL or Perkins loans are federally held, the lender will be listed as the Department of Education when you log in to Federal Student Aid.

The good news is that these loans will qualify if they are “consolidated” into a Direct Consolidation loan. This will change the loan type to a Direct loan and make it eligible for benefits like the payment suspension and the interest waiver. This will also mean that outstanding interest will capitalize and the loan will be treated as a new loan.

If you have Direct loans as well as FFEL and/or Perkins loans and you don’t want to consolidate, you can take advantage of the interest waiver on the Direct loans while directing payments toward your older loans that are still accruing interest.

Parent PLUS loans are loans taken out by a parent on behalf of their child to attend school. Some Parent PLUS loans were lent under the Direct loan program, and they will be federally held and eligible for the benefits in the stimulus package. Some older Parent PLUS loans were lent under the FFEL loan program and are not federally held and thus ineligible for the benefits in the new law.

If your loans are federally held, the lender will be listed as the Department of Education when you log in to Federal Student Aid. You can also contact your loan servicer to find out whether your Parent PLUS loans will qualify.

Like FFEL and Perkins loans, Parent PLUS loans can be consolidated into a Direct loan if they don’t qualify. This will change the loan type to a Direct loan and make it eligible for benefits like the payment suspension and the interest waiver.

 

Take a careful look at your loan interest rates and balances.

To most effectively target your payments, it will help to have a detailed breakdown of the balance and interest rate of each of your loans.

If you’re considering making monthly payments above the minimum on your loans, it will save you the most money over the course of your loan to target the loans with the highest interest rate. This is called the “debt avalanche” method.

If all of your loans have the same interest rate, you can target monthly payments toward your loans based on their balance. Some borrowers find it more satisfying to pay off smaller loan balances first (the “debt snowball” method.) If the interest waiver applies to your loans, this may also be a good opportunity to target loans with higher balances so they can’t accrue as much interest once it’s back in place.

 

Consider refinancing private student loans.

The interest waiver does not apply to private student loans, but with interest rates currently at historic lows, this may be a good time to consider refinancing your private loans. If you’ve already refinanced, you may be able to do so again for an even lower rate!

Different lenders will adjust to new interest rates at different times, so we’d recommend looking at multiple lenders to find the lowest interest rate you can. Summer’s free refinancing tool is a great way to compare options.

If you have federal loans, think carefully before making the decision to refinance. Once your federal loans turn into private loans, you lose federal protections and benefits like the interest waiver and flexible repayment options. Summer’s guide to refinancing goes into more detail on making this decision.

Even if these options are all available to you, we also want you to know that you don’t necessarily need to make any changes to your payments or loan situation if you don’t want to! During an already stressful time, your loans should not be an added layer of worry. But for those borrowers out there who are energized by dedicating the time to maximizing loan payments, we want to be a resource to you as well. Summer is always here to help, so don’t hesitate to reach out to our team! We’re looking forward to making it through this crisis together.