Editor’s Note: This article has been updated on March 14, 2020, to include information about President Trump’s plan to pause all interest on federal student loans.
Coronavirus is, first and foremost, a major health and safety concern. On a daily basis, new cases of the life-threatening disease are reported in the United States.
In addition to the significant health considerations, Coronavirus is already starting to have major economic consequences in the United States. The stock market fell due to Coronavirus fears, and the Federal Reserve has already made an emergency interest rate cut.
These larger economic events could be felt by student loan borrowers in several noteworthy ways.
Federal Student Loans will Not be Charged Interest
In the wake of declaring a national emergency, word broke that the Trump administration will be pausing all federal student loan interest. The length of the interest pause and the exact procedure have not yet been released.
BREAKING: Trump says to help students, he has waived **interest** on all student loans held by federal government agencies until further notice.
— Jennifer Jacobs (@JenniferJJacobs) March 13, 2020
The idea behind this move is that borrowers can pause payments without penalty. Details haven’t been released regarding any potential steps that borrowers might have to take to pause payments.
Trump could instruct the federal student loan servicers to stop collecting automatic payments, but such a move seems unlikely. The most likely outcome would be no change to payments or plans, instead, borrowers will just not be charged interest.
Another key question that remains unanswered is whether or not borrowers will need to take steps that might cause student loan interest capitalization.
Variable-Interest Loan Borrowers Could See Lower Interest Rates
In the context of variable rate loans, we often talk about the risk of interest rates increasing. However, the flip-side of that equation is that interest rates can drop.
With Coronavirus already hurting the travel and manufacturing industries, many investors are pulling their money out of the stock market and putting it into safer investments like bonds. Because there is more demand for bonds, the issuers can get away with charging lower rates. As a result, interest rates across the economy drop.
For student loan borrowers with variable-rate loans, interest rates may be going down. Most variable-rate student loans are attached to a benchmark rate. As the benchmark rate goes up or down, the student loan will move along with it.
Some benchmark rates are only updated four times per year, so it might be a bit of time before a borrower sees lower rates on their variable rate student loans.
Look for Student Loan Refinance Companies to Offer Better Interest Rates
When the federal government cuts interest rates, it means that financial institutions have access to “cheaper” money. In other words, if they can borrow at a lower interest rate, the savings can be passed on to the consumer.
Additionally, with the stock market slumping, investors may look for less risky investments. If investor interest in student loan related debt increases, it could be ideal for borrowers as the rates offered will decrease.
Refinancing on the eve of a recession can have two distinct advantages for borrowers:
- Lower Interest Rates – Locking in a lower interest rate means more money is available each month to lower the principal balance on the loan.
- Extending Repayment for Lower Monthly Bills – A borrower on a 10-year repayment plan may choose to refinance with a lender on a 20-year repayment plan. By extending the repayment length, the monthly payment can be dramatically reduced. This lower monthly payment could be valuable during any financial hardship.
Many student loan borrowers may fear that they may be in danger of losing their job or having their income reduced. Refinancing private loans into more manageable debt can be smart planning.
Despite the many advantages of refinancing at a lower rate, it is probably a mistake to refinance federal student loans. Due to the economic and employment uncertainty that many borrowers may face as a result of Coronavirus, playing it safe is important. Federal student loans have excellent protections that can be incredibly useful in a crisis.
Refinancing Could Become More Difficult
Now that we have just covered the reasons refinance rates could be dropping, it is worth noting that refinancing might become more difficult.
If the recession gets ugly, funds available for lending in certain areas could dry up. This is best known as a credit crunch.
The economics of a credit crunch can be somewhat complicated, but the short version looks like this: lenders run out of funds for new loans because investors fear that borrowers won’t be able to repay the debt.
If investors fear student loan debt in a recession, it may become harder to get approved for a loan, and the interest rates offered on a refinance may be higher.
The analysis in this section would seem to be the opposite of the previous section. This is intentional. Dropping refinance rates are probably more likely, but the danger of a credit crunch is real. Borrowers shouldn’t make assumptions about future rates. Even the best economists can only make educated guesses at what the future holds.
The key takeaway is that a major economic shift, such as a recession or pandemic, can have a significant impact on refinance rates. Borrowers should take advantage of opportunities that are available now, but keep in mind that better opportunities may present themselves in the future. It is a situation worth monitoring.
Federal Protections may be More Important than Ever
If the Coronavirus outbreak continues, many workers may see their hours cut or their jobs eliminated. For some, the consequences will be temporary, while others will deal with lasting financial impacts. Some people might even get sick and need to stay home unpaid.
Federal student loans can be helpful to borrowers who are dealing with a reduction in pay, a temporary loss of pay, or a total loss of income. While many private lenders may be willing to offer a forbearance or a deferment, only federal loans have income-driven repayment plans. For borrowers out of work, this means their monthly payment on their federal loans can be $0 per month.
Borrowers that lose their job should be sure to sign up for income-driven repayment as soon as possible. Going this route will usually mean that federal student loans are one less concern during a time of unemployment.
Making the Most of a Bad Situation
Coronavirus is scary for a multitude of reasons. Tweaking student loan strategy won’t change any of the virus concerns.
However, borrowers who find themselves isolated or worried about their finances should try to convert that nervous energy into something productive. Some student loan planning and investigation could lead to meaningful savings.