On March 27, 2020, the CARES Act was signed into law. The $2 trillion piece of legislation provided the first set of sweeping relief measures early in the COVID-19 pandemic.
One of the hallmark pillars of the CARES Act was the automatic deferral of federal student loan payments. Additionally, interest accrual was waived during this period. The benefit was originally set to expire on September 30, 2020, but President Biden has now extended the deadline for this to May 1, 2022. The Department of Education has estimated that for each month federal student loan payments and interest accrual are paused, it saves borrowers around $5 billion dollars.
Here we talk with Panacea Financial Co-Founders and practicing physicians, Drs. Ned Palmer and Michael Jerkins to hear their thoughts on the current state of federal student loans for physicians, dentists, and veterinarians, and what may be happening in the future.
Dr. Palmer: Initially, student loan payments were paused for economic relief. The initial CARES Act legislation deferred payments for 6 months as the country did not know where or how the pandemic would play out. Now, the reasons for ongoing deferments are simpler: the federal government isn’t ready to resume taking payments right now. 45 million borrowers have had their loans placed into COVID forbearance. For the 9 federal student loan servicers, this means that they have laid off support staff, call center workers, and payment processers required to run their loan servicing operations. Recognizing the challenges with the resumption in payments, it’s telling that three of the servicers – Navient, MyFedLoan/PHEAA, Granite Statement Management and Resources – have declined to renew their contracts servicing federal loans. These three leaving the servicer space means 15 million borrowers will have to be placed with new servicers which invariably leads to lost payments, delays in processing times, and increased borrower stress. The Biden administration has recognized that these organizations aren’t ready, and this added time is partly to offset the changes in servicers to give them more time to prepare for payment resumption.
Dr Jerkins: There are many reasons this occurred. The persistence of the pandemic with its effect on the workforce and the economy being a primary driver. But importantly the concerns on the economy also occurred during a particularly challenging time politically for the administration as they were ending the year without many legislative “wins”. They subsequently have faced political pressure to produce some tangible policy changes. Given Biden has the ability to extend the pause without congress’s approval, it was an easy way to circumvent a divided legislative branch.
Dr. Palmer: It all starts with preparation, and recognizing that doctors should begin preparing before May, 2022. First, determine if you are PSLF eligible. If so, you’ll want to make sure you’re in an income-driven repayment (IDR) plan. Whether you’re filing for the first time, or even if you’re already in an IDR, make sure that you have filed an updated IDR-payment plan request. This will ensure that when your payments resume, they are based off your current salary. Many doctors have seen decreased income as a result of COVID so your IDR-calculated payment should decrease as well. If you are not PSLF eligible, and are interested in taking advantage of the historically low interest rates, gather the following information: total loan amount, and your current servicers. This information will be required to private refinance, which could save you thousands of dollars.
Dr. Jerkins: It is anyone’s best guess as to what will happen next. Many observers in this space have pointed out that of all the extensions of the federal student loan payment pause, this most recent one represents the shortest extension thus far.. Given it is the shortest extension, and represents the smallest economic benefit (around $15 billion in total interest savings for borrowers), it may represent a true winding down of this program. Beyond this May, the mid-term elections are coming in the Fall of 2022, and will likely highlight the issues surrounding the ballooning student debt. This could lead parties to appeal to the constituencies that are most affected by this…and lead to another extension or alteration.
Federal student loans are subject to change as policies and political pressures continue to shift. If you have federal student loans, it behooves you to stay abreast of any proposed changes to your loans as it could have large effects on your pocketbook. If you have federal loans but are looking to refinance, or if you have private loans and are looking to save money by refinancing, check out our guide here.