Note: The $2 trillion Senate stimulus bill is likely going to supersede the Trump interest freeze within the next several days.
President Trump declared Friday, March 13 that he’s waived “interest on all student loans held by federal government agencies, […] until further notice.“
On March 20, Trump also announced that student loan payments would be suspended for 60 days for borrowers who opt to pause their payments. Borrowers must contact their student loan servicer to put their loans into a 60-day forbearance with no payments as this is not done automatically.
Here’s a few other useful articles we’ve put together for you to get the most student loan help during COVID-19:
- We recommend recalculating your income driven payment instead of forbearance
- Coronavirus could substantially lower borrowing costs for student loans next year
- See how the economic effects of the pandemic has affected borrowers like you
- Here’s the most and least financially affected jobs of the outbreak
According to the Dept. of Ed, any borrower currently in a repayment plan or forbearance would not accrue any interest until some undetermined point in the future.
Also, students currently enrolled in school would also not accrue interest.
Here’s what we know so far, and what I think it means for your student loans.
Interest is Waived, Payments Suspended
President Trump announced on March 20 that student loan interest and payments for federal student loans can be paused for 60 days without penalty.
Education Secretary Betsy DeVos announced that borrowers would automatically have interest rates on federal student loans updated to 0% for at least this 60-day period.
As far as payments, the 60-day period for suspending student loan payments is optional and borrowers will not be automatically enrolled into this forbearance. Borrowers who want to pause payments by putting their student loans into 60-day forbearance must contact their servicers directly. This can be done online or by phone.
Loans placed into this forbearance will not accrue interest during this period.
Many Federal Student Loans Are Not Included in This Interest Freeze
Only Direct Student Loans, federally held FFEL, and federally held Perkins Loans will get this benefit.
That means if you have these kinds of loans, you would qualify:
- Direct Stafford Subsidized
- Direct Stafford Unsubsidized
- Direct Grad PLUS
- Direct Parent PLUS
- Federally Held FFEL
- Federally Held Perkins
Most FFEL loans and Perkins Loans would not receive this interest subsidy because most of this debt is held by private banks and universities.
Private student loans would not receive a subsidy either.
The FFEL and Perkins programs no longer exist for new borrowers, so you would have to have borrowed before 2010 to have an FFEL loan. The Perkins loans tend to be very small and they haven’t been issued for several years.
So this interest freeze affects the large majority of student loan borrowers with federal student loans.
Interest Will Not Capitalize
During natural disaster forbearance, interest does not capitalize when you exit the forbearance at the end of the 90 day window.
However, interest does continue to accrue during a disaster forbearance. That will be different here as the student loan interest is covered.
In practice though, student loan servicers mistakenly capitalize interest all the time. I would be shocked if we don’t see thousands of errors that capitalize interest if borrowers signed up for the wrong kind of discretionary forbearance offered to them by their servicer.
For that reason, our recommendation is that you continue making payments unless you’re forced to ask for forbearance due to economic hardship from Coronavirus.
Students Will Not Accrue Interest Either
President Trump essentially turned students’ loans into temporary Stafford Subsidized loans, which accrue no interest during periods of deferment.
It wasn’t clear if the interest freeze included both students and borrowers in repayment. According to the Washington Post, borrowers currently enrolled in school also receive this interest subsidy.
It Could Take Months for Student Loan Servicers to Implement This
When the Revised Pay As You Earn (REPAYE) program came out in 2015 / 2016, it took servicers months to figure out how they would process the new interest subsidies the repayment plan offered.
This student loan relief from Coronavirus is supposed to happen now.
But there’s a low chance the servicers will be able to get it in place correctly anytime soon. When and if they do, they might have to remove student loan interest from borrower accounts.
Department of Education officials made this process sound easy, claiming “that the interest subsidy would be applied from Friday but that it will be implemented sometime next week.” That’s an extremely optimistic assessment.
The interest is not the problem. That does not help a family who needs to hold onto cash instead of watching it go out the door to their student loans.
There are already numerous programs to help lower payments during times of financial distress. For example, you can already apply for up to 3 years of forbearance on federal loans.
You can also recalculate your income driven repayment amount if your income fell for federal student loans.
For private student loans, you can often apply for 3 months of forbearance if you lose your job.
Borrowers Might Be Offered Something Similar to National Disaster Student Loan Forbearance
To show how bad the servicers are, whenever Washington declares a national disaster area, some servicers will place borrowers into an automatic forbearance even when they don’t ask for it.
The interest does not capitalize, which is the one good part. You get 90 days of paused payments.
If you use more forbearance than that, then you might have the interest capitalize.
When borrowers get automatically signed up for it, they don’t get any credit for student loan forgiveness payments.
If a borrower lives in a county with a disaster declaration, they get forced into paused payments regardless of their preferences by some servicers.
If you did not get affected by the disaster, that doesn’t help you.
If you did get affected, at least your payments get paused and you don’t have your interest capitalize.
Having Student Loan Payments Continue is Good for Borrowers Using PAYE and REPAYE
Making forbearance voluntary instead of mandatory certainly helps borrowers pursuing student loan forgiveness.
If you continue making your payments, the money will be applied to principal (or outstanding accrued interest) and you continue your countdown towards 10 years for PSLF or 20 to 25 for IDR forgiveness.
Student loan servicing companies have large numbers of employees in concentrated geographic areas in huge corporate office parks.
I would imagine many of their employees have to work from home right now or will soon.
Who is going to pick up the phones when millions of borrowers call to see if their payments or interest changed?
What will the poor phone reps tell people?
This is going to create a massive additional load on servicers that already do not do their jobs very well. I would not be surprised if borrowers see a huge drop in service levels because of this change while the servicers scramble to figure this out.
In my conversation with Ron Lieber of the New York Times, Ron raised additional questions about the possibility of workers at loan servicers processing this rule change. This makes me wonder if this rule will get implemented in the next few months, not one week as the Dept of Education suggests.
Will Borrowers Get Interest Refunded to Them Later?
Currently, PSLF borrowers who have overpaid on their 10 years of payments receive refunds for the months that they overpaid.
I’ve personally heard stories of borrowers getting over a dozen checks in the mail months after their PSLF application got approved to reflect that they made too many payments.
In theory, you would also get student loan interest refunded to you if the servicers can’t cancel the interest in their computer systems for many weeks.
But imagine changing the interest calculations for millions of student loan borrowers in incredibly old systems as a student loan servicer?
Now imagine trying to do it with most of your people working from home.
Borrowers Will Probably Have a Hard Time Monitoring Their Subsidy
While borrowers should expect student loan interest to be refunded if the servicers mistakenly add it to your balance, it will be an absolute nightmare as a borrower ensuring this.
When the student loan interest starts back up again, your loan payoff document could be completely wrong.
I also expect servicers will not document this subsidy for anyone to see on official statements or online.
If you pay off your loan or refinance it after interest starts again, will the servicer have an incentive to track you down for the excess interest you paid?
Get ready for hours on the phone with FedLoan Servicing or whoever your servicer is.
That said, the Department of Education claims interest will be paused as of today, with “operational logistics to be worked out later.”
How the Trump Student Loan Waiver Affects Student Loan Refinancing
I got some text messages from some friends who were about to refinance their federal student loans to ultra low rates like 3%, until they saw Trump’s press conference.
They were excited about a “0% interest rate until further notice.”
First of all, I wouldn’t be so sure that the government will get it applied properly.
If they do, clearly you would not want to refinance federal student loans right now, with one exception.
If you have a very low rate offered to you by a private lender, that rate might be much higher in a few months.
Interest rates could increase, and credit risk could increase too.
Either one of those things might end up costing you the ability to refinance at a lower rate now.
An Example of How This Waiver Might Function
Imagine you have $50,000 of federal student loans at a 6%.
Your interest charge is roughly $3,000 per year, or $250 per month.
If you refinanced to a 10 year fixed rate at 4%, your annual interest would be $2,000 a year, or about $166 a month.
At 0%, no interest would accrue.
What if you waited to refinance 6 months from now, but the 10 year fixed rate was now 5% instead of 4% for student loan refinancing?
Over 10 years, the difference in getting a 1% higher interest rate is about $3,000 on $50,000 of principal.
With 6 months of 0 interest payments, you’d save about $1,500 on a $50,000 student loan.
If the interest freeze only lasted for a couple months, then you’d only save $500 (two months of interest costs).
If the student loan interest freeze lasted for a year, you’d save $3,000 and clearly would be better off waiting, even if you got a higher interest rate.
Also, if you fight your loan servicer for hours trying to get them to apply this subsidy correctly, you might be worse off if you’ve wasted huge amounts of time depending on the value of your hourly wage and tolerance for pain.
I’d lean towards not refinancing any federal student loans right now, but some borrowers might still want to consider it if you think:
- The student loan interest freeze will be poorly implemented
- The freeze will be short in length (a couple months vs a year)
- That interest rates for student loan refinancing will rise significantly from current levels
The Waiver Does Not Apply to Private Student Loans
Definitely refinance your private student loans that already exist.
These loans receive no interest subsidy, so you want to reduce your student loan interest anytime you can find a better deal.
I would imagine the majority of student loan refinancing until this period ends will be for borrowers with existing private loans who want to cut their interest rate another 1% or 2%.
That’s happening for many borrowers right now because refinancing rates are close to record lows.
What Does The Trump Student Loan Interest Pause Mean For Your Student Loan Plan?
Realistically, very little.
If you need to pay your loans off, then you still want to do that. Any extra payments you make during this time would first go to any existing accrued interest you have. Once that’s gone, payments would all go to principal.
You might just wait on refinancing federal loans until there’s more clarity.
Beef up your emergency fund, increase your retirement savings and increase contributions to your brokerage account with excess cash during this period of economic uncertainty.
If you’re pursuing 20 to 25-year income-driven forgiveness or 10-year PSLF forgiveness, then an interest freeze does not affect you at all.
Most of your loans get forgiven anyway. The forgiven balance might just be a bit smaller, so continue making payments as nothing happened.
The Trump student loan interest waiver was clearly not thought out very well. It seems like the administration is trying to throw everything at the wall to see what sticks without much thought to the logistics.
Stick to your plan.
Expect a Return to Normal, We Just Don’t Know When
If you locked in record low interest rates on your student loans recently from refinancing, don’t despair.
This interest pause is temporary.
If you need to use forgiveness based on the math of your student loan repayment, that didn’t change either just because of this change.
We will return to normal, and federal student loan interest will start again soon. I don’t know if it will be in a month, 6 months, a year, or more.
I’ll also believe this interest freeze when I actually see it implemented. From my experience advising thousands of student loan borrowers, expect that the servicers will mess this up very badly.
I’m not a healthcare professional, but I know that the US economy and stock market has weathered far worse than Coronavirus.
Your savings rate matters the most right now.
Prepare for your own personal recession. Build up your cash savings to 1 year’s worth of expenses. Pay off all your consumer debt next.
Then consider increasing your retirement and taxable account investment contributions once you’re in a place of financial security.
If you are incredibly confused or anxious about your student loans during a tumultuous time, our team of professionals is happy to help.
tWhat do you think about Trump pausing federal student loan interest? Share your thoughts in the comments.