Coronavirus and Student Loans: Trump waiving Federal Student Loan Interest

· 5 min read

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Over the last few weeks, the news has been filled with the spreading of the Coronavirus (COVID-19) and how it is affecting the economy worldwide. Businesses are closing, stores are experiencing shortages of supplies and people are being laid off.

As a response to this, President Trump made the decision Friday afternoon to waive all student loan interest from accruing. Meaning any payments made towards the loan will apply towards the balance, with certain exclusions.

So, what does this truly mean for the millions of borrowers affected by this temporary waiver? One of the biggest questions that borrowers had was how this would affect their monthly payments? Before you start applauding in excitement, here is what you need to know regarding the waiver of the accruement of student loan interest.

What loans are affected by the waiver?

Not all loans will be eligible for the waiver. If you currently have a private student loan or a federally guaranteed student loan not held by a U.S government agency, then the freeze will not cover the interest of these student loans. The servicer for the student loans needs to be the Department of Education. If the servicer is an agency such as Sallie Mae, borrowers do not benefit from the freeze.

Any interest that you have accrued thus far, will still need to be paid before any payments will apply towards the principal balance of your student loans. This freeze will not wipe out interest that you have already accrued.

What borrowers will benefit from the freeze?

Borrowers that are currently experiencing financial distress due to the coronavirus or will be experiencing financial distress will have short-term relief from the waiver. Borrowers that are not serviced by state agencies and those in income-driven repayment plans or public service loan forgiveness programs will also breathe a sigh of relief from the waiver. Keep in mind this does not mean that monthly payments are lowered or waived, the interest simply is suspended for the time being. Which brings us to the next question

How will the borrowers benefit from the freeze?

To reiterate the purpose of the waiver is to freeze interest from accruing on federal student loans. Borrowers will not see an immediate benefit as they are still required to make their monthly payments unless their loans are in forbearance, however, the benefit will unveil at the tail-end of the loan. Meaning the principal balance will be lower which may result in these federal student loans being paid off sooner.

The exact details of how this will work are still being worked out by the government. As of the weekend, the government still had no answers on how it will work and how it will be handled. What we do know is:

  • This waiver is automatically put into effect- therefore there's no need to contact your loan servicer.
  • Student loan payments will be principal only while the waiver is in effect.
  • Borrowers will notice that their balance will not increase but payments will remain the same.

Here is what is unclear regarding the freeze:

  • How will it work?
  • How long the freeze will be in effect?
  • Will capitalization of unpaid interest get tacked on at the back end when the waiver is no longer in effect?
  • Will loan service providers recalculate monthly payments after removing the interest from the loans?
  • Will the federal government decide to pause monthly payments during this waiver period?

Who will the freeze hurt?

With all the discussion aimed towards how this will benefit those in financial hardship, what about the borrowers that use the interest paid as a write-off or tax deduction? This could have a negative impact on their tax bill, even though they will pay off their loans sooner. For those in an income-driven repayment program, this will still help pay-off their loans sooner. Even if the principal balance remains untouched during the waiver period, most of these loans are under student loan forgiveness programs in which their loans will be forgiven after a certain period.

How should borrowers take action to benefit from the waiver?

If you owe a great deal of interest towards your student loans, there is no guarantee that you will have any amount applied to the principal balance based on the current waiver policy. If you are one of the many student loan borrowers that are affected by the coronavirus and economic downfall, then you should take action and consider repayment options that will provide you with short-term relief.

What is recommended to current borrowers?

Experts recommend paying as much of your student loans as you can during this period if financially possible. If you are not experiencing threats of layoff or loss of income, you should try to pay what you can and seek out a forbearance when you are experiencing financial hardship. When you do experience financial hardship, contact your loan service provider regarding repayment options or deferments. Just remember that the longer you defer the payment on your loans, the longer it will take for you to pay off the loans.

What is the Department of Education’s take on the waiver?

According to the Department of Education, the waiver will be retroactive to March 13th. Monthly payments will not go down, however, the entire payment amount will be applied to the principal balance. The Department of Education encourages borrowers to pay as much as they can each month because the length of the policy is unknown. They still claim there is a lot of the waiver that is unknown to them, but that within a week the loan service providers that are part of the waiver program, should have the policy implemented.

At this point, everything is still in the works, so a lot of questions have gone unanswered. Even the four major federal student loan servicers are unable to answer questions that borrowers have regarding the waiver program. The response that seems to be given when questions are asked, is that details will be available as soon as everything is ironed out.

What to expect?

Borrowers that are in a payment deferment or forbearance program are required to make little to no payments on their student loans, however before the waiver, the interest would continue to accrue and pile up, making it harder to get out of their student loan debt. With the policy in effect, they will notice that the interest will not accrue, the principal loan will not increase, however, if they are not making payments, then the balance will not decrease either causing a longer period to pay off loans.

It is advised to use a deferment or forbearance program as a last resort if you are determined to wipe out your student loan debt. Instead, look into other repayment options that will benefit you in the long run even though the waiver is short-term. This is where we come into play.

What are your repayment options?

Many repayment programs will help you with student loan forgiveness. The public service loan forgiveness program allows loans to be forgiven after 120-payments even if payments that are required are $0 every month. This program is income-driven for those that are healthcare professionals or emergency medical workers.

Another option to consider is refinancing your student loans. This is ideal for borrowers that have good credit, but it is an option. Currently, interest rates on student loans are between 3.4% to 8.5%, it is anticipated that when the waiver policy ends interest rates will reduce, which is the time to refinance loans with a private lender to lower your principal balance.

Take advantage of the student loan interest waiver and make extra payments towards your student loans. Be leary of repayment programs that do not offer forgiveness for your loans. Many of the repayment programs will wind up increasing the length of your loan payments even though the amount of your loan payments are not increased.

The freeze is a temporary fix to the ongoing pandemic caused by the coronavirus (COVID-19). Therefore, the end result is you still need to take care of your student loans. If you are unsure how you can take advantage of the freeze and help pay off your student loans, we can help. We have a growing number of partners that will help you find repayment options in any type of capacity for debt relief.

Ask questions and do your research, in addition to redoing your monthly budget to be able to make a payment towards your student loans. Opt for a student loan forgiveness program rather than a deferment or forbearance.

After reading this, the important thing that should be taken away is that this is a short term relief. If you are not financially affected by the coronavirus, continue to make your payments on your student loans while all the details are still being worked out. Even if the policy changes later down the road, at least you know for the time being you are not accruing interest on your student loans and the balance as of March 13th is what you have to pay off. Take the time to address your student loans, we are here to help, if needed.

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