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government shutdown

What Does the Government Shutdown Mean for Your Student Loans?

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Update: On January 25, 2019, a short-term spending bill was passed, temporarily ending the partial shutdown until February 15, 2019. A second spending bill was passed on February 15th, 2019. 

As we are now in the longest partial government shutdown in US history, a question anyone with student loans might have right now is, “do I still have to pay these during the shutdown?”

While the short answer is yes, there are options for furloughed employees who may need extra help.

Here we will tackle the key points student loan borrowers should know.

What Is a Government Shutdown?

As you might have guessed, this means that the federal government is no longer operating at full capacity. As of December 22nd, 2018, the funding of several agencies ended, and a new budget has yet to be approved.

This means we are in a partial shutdown, as some agencies remain open. Until the budget is approved, the unfunded agencies will not be able to pay employees and might be operating with a limited staff, or not operating at all. The earnings of contractors for government agencies could also be affected.

Government Employees or Contractors with Student Loans

The government may be shutdown, but bills will continue to come due. If you have been furloughed, or could be furloughed if the shutdown continues, consider revising your budget in the short-term. If you don’t have another source of income consider reducing your spending to the essentials so that you have cash on hand.

Prioritize making the minimum payments on all financial obligations to avoid penalty fees. Contact your student loan servicer and any other creditors. Make sure your creditors know that you were furloughed and see if there are any programs to postpone payment for a short period of time.

If you’re having difficulty making your student loan payment, you may be able to reduce it with another repayment plan or temporarily postpone it with deferment or forbearance. One important thing to remember when considering deferment or forbearance is that interest may continue to accrue during the period you are not making payments. Unpaid interest may be capitalized or added to your loan balance, which means your future payment may increase.

Income-driven repayment may be another option for your federal student loans. If you’re already enrolled in an income-driven repayment plan, you can look into lowering your monthly payment due to a change in income. To do so, visit the income-driven repayment form on the Department of Education’s website, Check all boxes that apply, for example, that you would like your payment amount recalculated, that your income has significantly changed, and–if applicable–that you don’t currently have any taxable income. Keep in mind that interest may accrue even if you qualify for a zero payment, but you’ll continue to make progress toward potential future loan forgiveness, including Public Service Loan Forgiveness for Direct loans, if that’s your goal. Don’t forget to update your income information once you resume receiving paychecks.

If you typically rely on an employer student loan benefit to meet your monthly student loan payment, recognize this support will likely be on hold, so you might be paying a larger bill this month than you are used to.

Delinquent loans that are 45 to 90 days late will still be reported to credit bureaus, as these companies are not affected by the government shutdown.

How Does the Shutdown Affect Borrowers?

You don’t have to be a government employee to feel the effects of the shutdown. A large section of the IRS workforce has been furloughed, meaning we might go into tax season with a short-staffed IRS.

The IRS will continue to accept (and expect) returns and tax payments, and has announced it will bring back staff to issue refunds despite the shutdown. Still, those who rely on a tax refund should review their budget and start to make a plan in case refunds are delayed.

Federal student loan borrowers who are applying for, or re-certifying for, income-driven repayment plans will need to provide income tax information as well. The automated tool that transfers income information from the IRS to the Department of Education is operational at this time, but you can always use alternative documentation such as a pay stub or letter from your employer if there was an issue in the future.

Are you applying for a new job? You might see a delay in the hiring process, as the E-Verify service by the Department of Homeland Security is no longer available “due to the lapse in federal funding”.

What Does the Shutdown Mean for Current Students?

Students who took out Federal Direct student loans for the 2019 spring semester are in the clear, as their loan amount will be honored.

FAFSA submissions will also still be processed and reviewed, but students who need to include a tax transcript or register for selective service prior to applying might hit a bump in the road with a large portion of IRS employees furloughed.

The Department of Education was already funded through separate legislation, so operations should continue for now, and the agency will be able to answer any questions.

If you are an Earnest client and experiencing a financial hardship as a result of the government shutdown, please reach out to our Client Happiness Team.

This article was written by Carolyn Pairitz Morris, Senior Editor at Earnest.

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Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.