On Friday, March 13th, President Trump and his coronavirus task force held a press conference to announce several measures that the federal government were taking to relieve the effects of this crisis.
In addition to revealing things like drive-thru testing and an upcoming economic relief package, another benefit was briefly mentioned — a federal student loan interest waiver. Immediately, I began hearing from borrowers who were excited to hear the news. And some borrowers reached out to me to say they were putting any plans to refinance their student loans on the back-burner.
But the student loan interest waiver has been widely misunderstood. And, unfortunately, it won’t provide tangible relief to as many borrowers as some may think. Let’s take a look at four different student loan scenarios to see which borrowers will (and won’t) benefit from the student loan interest waiver.
Scenario 1: You Want to Lower Your Monthly Payments
Here’s a surprising fact about the student loan interest waiver. It won’t lower your monthly payments. Confused? Don’t feel embarrassed. I was confused too until I read this excellent New York Times piece by Ron Lieber.
Here’s the deal. Going forward (until the waiver is canceled), 100% of your monthly payments will go towards principal instead of principal + interest. Let’s say you’ve been paying $500 per month, of which $150 was going towards interest. Effective immediately, all $500 will start going towards paying down your principal.
On one hand, that’s a nice benefit that could help you pay off your student loans sooner. But, on the other hand, this waiver won’t provide any extra cash flow to your budget. And that’s probably what you’d be looking for if you suffered a job loss or an hours reduction as a result of the coronavirus crisis.
In short, Trump’s student loan interest waiver won’t help you if you’re looking to lower your monthly payments. If that’s your goal, you have three options: Join an Income-Driven Repayment (IDR), apply for forbearance, or refinance your student loans to a lower rate.
Scenario 2: You Want to Save Interest Over the Long-Term
If you were planning to refinance your student loans, that may seem silly now. After all, why would you take out a new student loan at a 2% to 4% interest rate, when you’re federal student loan interest rate is currently at zero?
But, keep in mind, this student loan interest waiver is intended to be temporary. The idea is to provide relief for Americans while they deal with the fallout of the coronavirus crisis. But there has been no discussion (as of yet) to make this a permanent change.
Meanwhile, the Fed just cut its interest rate down to zero to as an economic stimulus. When the Fed rate goes down, refinancing rates on things like student loans, mortgages, and other products generally go down as well. What that means is we’re currently seeing historically low student loan refinancing rates.
With federal student loan repayment plans lasting 10 to 25 years, a few months of 0% interest won’t have a dramatic effect on your overall cost. So if you’re looking to save interest over the long-term, locking in a low rate via refinancing could still be a smart move.
Scenario 3: You Want to Maximize Student Loan Forgiveness
If you’re currently on an Income-Driven Repayment (IDR) plan, there’s a chance that a large majority (if not all) of your student loan payment is going towards interest. In fact, your balance may be growing each month. I have a friend who’s a physical therapist and has been paying on her loans for 6 years. She hasn’t cut into her principal by even $1.
However, in my friend’s case, she’s not concerned because she works at a non-profit hospital and is pursuing Public Service Loan Forgiveness (PSLF). You may be working towards PSLF as well. Or perhaps you’re planning to pursue IDR forgiveness. Borrowers are eligible for forgiveness on IDR plans in 20 to 25 years.
In either of these cases, Trump’s student loan interest waiver could have a surprisingly negative effect. It could cause your tax bill to go up. Here’s why. Borrowers receive a tax deduction for the student loan interest they pay. But if a larger portion of your student loan payments go towards principal this year, that tax deduction will go down.
On one hand, the student loan interest waiver isn’t expected to stay in effect long enough to make a serious difference in your overall repayment timetable. Yet it could stay in effect just long enough to cause a sizable increase to your 2020 tax bill.
Scenario 4: You Want to Pause Payments Completely
If you’ve made in this far into the article, you may assume that I’m totally against Trump’s student loan interest waiver. But that’s not the case.
I do think it could have been a bit more thought out. But there’s one group of people that stand to benefit from the student loan interest waiver in a major way. And that’s borrowers who will need to place their loans in forbearance.
If you need to pause payments on your student loans, President Trump’s student loan interest waiver could save you a lot of money. Typically, interest continues to accrue during a forbearance. But that won’t be the case for the foreseeable future. And that’s a big deal.
Will Trump’s Student Loan Interest Waiver Help You?
If you’re looking to lower your monthly payments, reduce your long-term interest cost, or maximize student loan forgiveness, the president’s student loan interest waiver may fall short of your expectations.
But if you need to place your loans in forbearance at any point during the coronavirus crisis, the student loan interest waiver could be a godsend. It could give you precious time to focus on other financial needs without having to worry about a growing student loan balance.