CARES ACT: Student Loan Repayment Benefit up to $5,250 annually +Lower Re-Fi Student Rates
[Disclaimer] This article was written to the best of our knowledge with the latest news released from the Federal government. There are many moving parts to both of these programs, and as the days and weeks pass, there may be more clarification to some parts that are vague or confusing. Please be mindful, that I have tried to gather as much information that I can, and may miss some details worth noting.
Prior to the COVID-19 Pandemic hit, the burden of student loans exceeded $1.6 trillion, with the average American holding close to $30,000 in student debt. New optometry graduates had it even worse with student loans exceeding $230-250,000 - close to a quarter million in debt.
This forced many young doctors to put off major life milestones such as saving for retirement or buying a new house. Then COVID-19 hit. Combined with the loss of steady payment, many young optometrists felt the pressure of financial stress, leaving many unable to pay their student loans.
The $2.2 trillion CARES Act stimulus bill President Trump signed into law last Friday had a large part in helping out small businesses, but under Section 2206 of the bill, this included a temporary tax-free new student loan repayment benefit for employees as well.
In this article, we will go over the Key Points + FAQs of the Section 2206 provision:
Section 2206 Provision (CAREs): Key Points + FAQs
What is the Section 2206 provision and how much do associate ODs benefit?
An employer may contribute up to $5,250 annually toward an employee’s student loans, and such payment would be excluded from the employee’s income.
Does this already exist? Will it be costly toward my employers?
While this is not very common among Optometry, but about 63% of US companies offer some level of tuition assistance, such as employer-paid student repayment assistance programs (LRAPs). So this provision simply provides a temporary tax-free status to employers. Student loan payments of principal and/or interest by the employer can be sent directly to the employee themselves or to the loan servicers.
"An employer may contribute up to tax-free $5,250 annually toward an employee’s student loans, and such payment would be excluded from the employee’s income until end of December 2020"
How long does this tax-free status last for?
This temporary tax-free provision will only last through December 2020. But it is likely going to be extended, or even in place permanently, since pulling back a huge tax break that helps young students is rarely a good political move.
Does this apply to private Refi Student Loan?
Yes! Both Federal and Private Re-fi student loan payments qualify for it. In addition, it can also be used toward tuition and educational materials for current part time students in school as well.
How do I get my employer to enroll?
While many struggling optometry businesses are not exactly going to rush to provide this additional benefit during this crisis, we want to reinforce the idea that having this additional benefit will attract top-talent doctors and appeal to young optometrists. Also, it is a tax-free expense for a business.
But if you are already working at an optometry office with the LRAP Student assistance program in place, then great! Just tell your employer to increase the allowance to $5,250 annually and take advantage of the tax-free benefits.
If your optometry office doesn’t offer it, it is simple to enroll with programs like Tuition IO, which offers businesses the most complete and easy student loan repayment assistance plan. This benefit can be integrated with payroll administration and takes roughly 30 minutes of HR Staff time per month to administer.
Optometry Owners: To find out more about how to Set up your own Student assistance program, check out "Tips for Launching a Student Loan Repayment Benefit"
"It is easy for practice to enroll with programs like Tuition IO which offers businesses the most complete and easy student loan repayment assistance plan. This benefit can be integrated with payroll administration and takes roughly 30 minutes of HR Staff time per month to administer"
Federal Student Loans Key Points Update
There has been much debate about what exactly this means. Here are some Keys Points that we know so far and what it means for your Federal student loans:
(1) This will only impact Federal Direct Student Loans. Not all types of Federal Loans will qualify such as FFEL (Private Banks) or Perkins Loans (University)
(2) The Zero Interest Waiver is effective immediately and automatically for 6 months (until End of September 2020) or until further notice. All interest will be back-credited
(3) Lack of staffing affected by Coronavirus will likely reduce service, so expect longer wait times
(4) No garnishment of wages, Social Security and tax refunds for student loan debt collection for those in default
(5) Automatic Suspend payments forbearance for up to 6 months (until End of September 2020). You will get credit back for any payment made during this crisis
6) For 10 year PSLF (and other forgiveness programs), you will NOT get penalized for NOT paying payments during the 6 month Forbearance period. So it will count toward your 120 income-based qualified payments - but keep track of it
(7) Students currently enrolled in school (undergraduate and graduate) would also not accrue interest
(8) Benefits begin on March 13, 2020 to end of September 30, 2020.
Want to know more details about Federal loans? Click here to read "Trump Declared a 0% Student Loan Interest Waiver and Allows Borrowers to Suspend payment for up to Six Months, What should you Do?
Private Refi Student Loans Key Points Update
(1) If you are having difficulty paying your loans, Sofi, Earnest, CommonBond, Brazos, Laurel all offer forbearance/deferment options. Splash, Credible and Lendkey will be dependent on individual lenders since they work with multiple banks. First Republic Bank does not, however always call to ask options
(2) If you were on the fence about Refi your students, you might consider waiting and enjoy the interest-free benefits on your federal loans for the next 60 days. Then reassess your situation again.
(3) You should Re-fi with Splash who is currently the LOWEST Refi Lender (as of 4/1/2020) if:
- You have an existing Re-fi student loan at 4% or greater and want to take advantage of the lower rate
- You are planning to refinance anyway and want to lock in a lower interest rate.
Why is the Splash Re-fi rate so low, while other major Refi Lenders rates are climbing?
Typically in a stable economical market, if the federal interest rate is lower (usually to stimulate economic growth); the low interest rates lower financing costs for banks, which they then pass on to consumers - to encourage borrowing and investing. However, when rates are too low, they can spur excessive growth and perhaps inflation.
When Trump announced the federal interest rate to 0%, 3 Reasons why did major student Refi go up?
- 1) There was too much demand for refi student loans, and thus lower supply
- 2) Sofi, Earnest and other major Re-fi companies sell these Re-fi Student loans as “securities” to Wall Street (basically to investors). Investors are simply not interested in these financial products for 2 reasons:
- (a) The profit margin is too low
- (b) They are concerned about the risk of default due to the current climate.
- 3) Major Refi lenders will see a trend where they have too many people in forbearance/default, then they will shift that burden to new borrowers to stay afloat. Thus, they need to keep their interest rates higher.
Splash is unique because it works with credit union banks, which keep the refi student loans in house and don’t sell to the open market. Thus, as long as they are making a profit, they are able to offer these super low rates compared to their competitors. They are able to offer fixed rates in the 2% range, while other lenders are in the 4%.
As always, do what is best for your own financial situation. We are here to help!
Click here to see how Splash compare to other Student Refi Rates (as of 4/1/2020)
"Splash is unique because it works with credit union banks, which keep the refi student loans in house and don’t sell to the open market. Thus, as long as they are making a profit, they are able to offer these super low rates compared to their competitors. They are currently offering fixed rates in the 2% range, while other lenders are in the 4%.
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