Forgivable Loans and the CARES Act

Forgivable Loans and the CARES Act

The federal government passed several emergency aid bills during the COVID-19 pandemic that were meant to help people survive during what was one of the most challenging times in U.S. history.

The first of these aid bills was called the CARES Act. Passed in March 2020, there were many aspects to the multi-trillion-dollar package. Multiple forgivable loans were created specifically for use by small businesses, while other forgivable programs were created for individuals.

Below is a description of some of the most popular of these new programs under the CARES Act.

Disaster loans

The CARES Act created a COVID-19 Economic Injury Disaster Loan, more commonly known as the EIDL. There were two types of EIDL programs created by the bill.

The first was a loan program through which small businesses could use funds to pay for working capital and other normal operating expenses. These loans aren’t forgivable and had to be repaid.

There were different requirements for this EIDL loan, depending on how large the loan amount was. Loan increases were also available until all the funds were exhausted.

The second type is the EIDL Advance funds. They were awarded to existing EIDL applicants who met additional criteria. The Advances are treated like grants without the typical requirements the federal government places on such programs.

Because of their grant-like nature, EIDL Advance funds were forgivable and didn’t need to be repaid.

Public Service Loan Forgiveness (PSLF)

The CARES Act also included programs for loan forgiveness and a break in repayments for borrowers of federal student loans. 

The Public Service Loan Forgiveness program, or PSLF, applied to borrowers who had federal direct loans. These borrowers could qualify for loan forgiveness after they made 12o monthly payments while they were working for an eligible employer on a full-time basis. 

Payments made as part of an income-driven repayment plan also qualify as payments toward the PSLF. 

The CARES Act automatically suspended student loan repayments for federal loans from March 13, 2020 through September 30, 2020, and that pause was extended multiple times. 

Paycheck Protection Program (PPP) vs. CARES Act

Perhaps the most popular program created by the CARES Act was known as the Paycheck Protection Program, or PPP. It is essentially a new loan backed by the Small Business Administration aimed at helping small businesses continue employing their workers during the pandemic.

The money handed out under the program was a loan that could turn into a forgivable grant if the recipient met certain qualifications. 

Loans of as much as $10 million were available to small businesses to use for as much as six months of their average monthly payroll costs from the previous year. Businesses that received the loans could use as much as 40% of the total on non-payroll costs, including utilities, rent and mortgage interest.

All loans were for five years with a fixed interest rate of 1%. If the loans were used for the purposes described above, they could qualify for full forgiveness. The amount to be forgiven would be reduced, though, depending on how the funds were allocated.

Small business debt relief program

The SBA also offered other small business debt relief programs through the CARES Act. The SBA would pay six months of principal, interest and all associated fees for borrowers who have an SBA Microloan, 504 or 7(a) loan. 

The debt relief depended on when the loans were taken out and didn’t apply to the EIDL program.

Can a small business get an EIDL and a PPP loan?

Small businesses were eligible to receive both an EIDL and a PPP loan under the CARES Act. However, the funds from these two separate loan programs could not be used to cover the same expenses. 

Direct forgiveness through SBA

The SBA was the agency tasked with handling the loan forgiveness programs created through the CARES Act. This made sense, as the agency already offered many loan programs with favorable rates for small businesses.

SBA’s new loan program for small businesses

The PPP was the most popular new loan program created for small businesses under the CARES Act. 

Those that were eligible to apply must have 500 employees or less. Each business could apply for a loan worth as much as 250% of its average monthly payroll costs — with a maximum of $10 million — and it was meant to cover up to eight weeks of payroll, and help with the other expenses mentioned above.

Those who are self-employed, an independent contractor or sole proprietor were also eligible to apply for a PPP loan. Any portion of the PPP loan that wasn’t forgiven was subject to a loan term of 10 years, with a maximum rate of 4%. 

Conditions for loan forgiveness

In order for small businesses to receive loan forgiveness under the PPP program, there were a number of requirements they had to meet. Only 40% of the funds could be used for non-payroll expenses, while the rest had to be used to maintain payroll.

Businesses that received these loans had to compile proper documentation, fill out a forgiveness form and submit the documentation to the lender. Those files would all be reviewed, with a decision sent back to the small business.

Loan Payments

Small businesses that received a PPP loan before June 5, 2020, had to repay their loans fully in two years, or within five years if they were approved after that time. Payments could also be deferred for as much as 10 months after the disbursement date of the loan. 

Updates for eligible borrowers

Most of the forgivable loans created by the CARES Act have expired. That being said, there is still time to apply for forgiveness if you haven’t already.

The SBA also offers many other loan programs for small businesses that are much more favorable than traditional loans from private financial institutions. Terms of those loans depend on which loan you’re applying for and what you want to use the money for.