Under the CARES Act, millions of Americans will be receiving stimulus payments of up to $1,200, which they can use as a financial cushion in light of the growing economic crisis.
But 44 million Americans also carry student loan debt. Many are worried about how their stimulus checks could impact their student loans. Some fear that their student loan lender could even seize their stimulus payment and apply the funds to their student loan debt.
Here’s what you need to know.
Borrowers in Default on Federal Student Loans
Normally, when someone is in default on their federal student loans, the government can intercept any federal money directed to the borrower (such as a federal tax refund or Social Security payments). The government can then apply those payments to their defaulted federal student loan debt. This is through a program called the Treasury Offset Program (TOP).
However, under the CARES Act, the U.S. Department of Education has suspended all collections on defaulted government-held federal loans, including Treasury Offset, through September 30, 2020. In addition, the CARES Act shield stimulus payments from Treasury Offset interception.
Borrowers on Income-Driven Repayment Plans
Many borrowers are repaying their federal student loans under an income-driven repayment plan, such as Income Based Repayment (IBR) or Pay As You Earn (PAYE). These plans use a formula applied to the borrower’s income to calculate monthly payments. The payments get recalculated annually. Any changes to the borrower’s income or family size can result in changes to the monthly payment amount.
Some student loan borrowers have been worried that their stimulus payments could change their monthly payment amount under an income-driven repayment plan. But this should not be the case. Only “taxable income” is considered “income” for purposes of calculating monthly payments under an income-driven plan. Under the CARES Act, the stimulus payment is not considered “taxable income” at all. Borrowers do not have to report the stimulus payment as income to their loan servicer, and it should have no impact on monthly payments under an income-driven repayment plan.
Impacts on Private Student Loan Borrowers
Private student lenders have no power to take any income, assets, or property from a student loan borrower without legal authority to do so. This means that borrowers who are not in default on their private student loans (whether those loans are in repayment or in some sort of deferment or forbearance) should not have to worry about their stimulus checks being seized by their lender.
For borrowers in default on their private student loans, however, the situation is a bit more complicated. Even while in default, private student lenders generally cannot seize any income or assets from a borrower without legal authority, and that usually means a court order. The exception is for borrowers who have a defaulted private student loan held by their bank. If a borrower also has a checking account with that same bank, some banking agreements allow the bank to offset that bank account to satisfy defaulted loans held by that bank. That could potentially include a stimulus check that is deposited into that bank account.
Furthermore, private student loan lenders who have secured a court judgment against a borrower due to a defaulted student loan could potentially seek a bank account attachment to satisfy that judgment. If a stimulus check was deposited into an account subject to a bank account attachment, that payment could be at risk. Whether a lender can do this or not largely depends on state law. Some states, such as Massachusetts, have enacted emergency regulations prohibiting those types of debt collection actions during the Coronavirus crisis.
