by President Trump said he was waiving interest on federally held student loans because of the coronavirus outbreak. But payments won’t change.
At the end of a week full of talk about bailouts and stimulus, President Trump said Friday afternoon that he was waiving interest on all student loans held by federal government agencies. Right away, the most obvious question was this: How much would monthly payments fall for the tens of millions of borrowers?
By nightfall, the Department of Education had a surprising answer. Monthly payments aren’t going to go down at all. Instead, the entire payment will go toward paying down the principal amount on the loan.
The result will be little short-term relief for many of the borrowers who celebrated the announcement. Instead, they will benefit later — say, if they pay enough principal during the waiver period to shorten the scheduled term of their loans.
There is a group of borrowers who could benefit a great deal: those whose incomes have fallen, or might fall soon, because of the economic contagion of the coronavirus.
When borrowers pause their monthly payments because of a hardship — a status known as forbearance — the interest normally continues to pile up until they can start paying again. Now, no interest will accrue as long as the waiver is in effect. This is true both for people already in forbearance and for those who may be soon.
It’s not clear who decided to do things this way and why, or even if any of this was the initial intention of the White House. Establishing an interest-rate waiver that lowered bills would have been enormously complicated: The federal government relies on several outside servicers to bill borrowers and collect their payments, and many have committed errors in recent years.
So there’s a lot we don’t know, and there are many questions the Department of Education could not immediately answer. We’ll get to those, but first, a bit more about what we do know.
The waiver will cover plenty of borrowers. The federal government is the biggest holder of student debt, with $1.2 trillion in direct loans to more than 35 million borrowers.
But it doesn’t apply to every student loan out there. Loans issued through state agencies and others, including from big private lenders like Sallie Mae, are not covered. Other loans that are not part of the waiver program include the majority of Federal Family Education Loans, which are mostly held by commercial lenders, and school-held Perkins loans.
The waiver is automatic; you don’t have to contact your loan servicer to be eligible. And the Education Department said that it expected servicers to have “operationalized” the change in about a week and that the waiver would be retroactive to Friday.
Interest will be waived for borrowers who are in income-driven repayment plans, which includes everyone seeking to have their loans erased by the public service loan forgiveness program. People in that program, which covers all sorts of workers, including health care professionals and emergency medical workers, will still have their monthly payments count toward their 120-payment goal, even if they aren’t required to pay anything at all because their income is very low.
But many questions are still unanswered.
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Most important: Will the waived interest be tacked on to the principal once the waiver period ends? I asked about this repeatedly, but the Department of Education did not offer an answer. This is crucial: If the waived interest is added back later — a process known as capitalization of unpaid interest — it could be costly for borrowers.
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Are federal PLUS loans, which graduate students and parents use, part of the waiver? There is no reason they wouldn’t be, but I could not get confirmation on this.
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Does the Department of Education really have confidence that its loan servicers can handle these changes on the fly, in a week or so? I don’t.
The entire federal student loan system has grown more complex over time, so making a substantive change poses a serious challenge. On top of that, many servicers have sown confusion among borrowers, especially those in the public service loan forgiveness program.
Servicers are likely already experiencing high call volumes, as restaurant workers and others lose their jobs or see their incomes fall. And there’s no telling what might happen if they need to send their call center employees home.
Travis Hornsby, the founder of Student Loan Planner, which makes money through courses, personalized advice and refinancing commissions, had his own questions when we talked on Saturday. First, what happens to students whose payments are deferred while they are still in school but whose interest is still supposed to pile up?
Here’s another scenario, which begins with the fact that there are many different kinds of repayment plans. Plenty of borrowers are in repayment plans with monthly bills so low that additional interest accrues and piles up over time. According to Mr. Hornsby, any extra money that borrowers repay is supposed to go toward lowering the volume of dollars in that accrued interest bucket first. Will this new waiver change that and cause monthly payments to go toward principal instead?
In response to some of my questions, a Department of Education spokesman sent an email saying the following: “We are finalizing the details and will share them as soon as they are available.”
I’ll be putting the rest of these questions to them immediately. And I’ll pass the answers on to you once I have them.
