As part of the financial relief during the Coronavirus epidemic, interest rates on most federal student loans have been temporarily lowered to 0%. Payments have been suspended through December 31, 2020.
Due to bipartisan support and the ongoing pandemic, the odds are very good that the government will extend the payment and interest freeze into 2021.
However, there is at least one scenario in which federal student loan payments and interest will resume on January 1, 2021.
Background on the Student Loan Interest and Payment Suspension
March 27, 2020 – Congress passes the CARES Act. As part of a much larger Covid-19 relief package, the CARES Act froze student loan payments and interest through September 30, 2020.
August 8, 2020 – President Trump extends the student loan relief. President Trump issued an executive order instructing Secretary of Education Betsy DeVos to continue the CARES Act interest rate break until December 31st, 2020.
Borrowers should take away two important details from this very brief timeline. First, both parties have supported suspending federal student loan payments as Coronavirus relief. Second, a federal payment and interest freeze can be extended through legislation or by executive order of the President. In other words, a President Biden or a President Trump could extend the interest freeze regardless of the election outcomes in the House and the Senate.
However, the outcome of the election could influence future student loan relief.
Could Donald Trump Extend the Student Loan Interest Freeze if Re-elected?
If President Trump were to secure a second term, the odds are pretty good that the interest and payment suspension will continue.
Even though Trump has wavered in his assessment of the severity of the Covid-19 pandemic, he has consistently supported the student loan payment and interest relief.
If Joe Biden Wins the 2020 Election
Biden has not explicitly stated how long he thinks that federal student loans should remain interest-free.
However, he has been a supporter of the financial relief provided in the CARES Act, arguing that even more assistance is necessary to help the economic recovery.
The most likely outcome would be that Biden extends 0% interest on federal student loans as long as Covid-19 continues to influence student loan borrowers’ finances. Such a move would be in line with Biden’s proposed plans to make life a bit easier for federal borrowers.
Further, the HEROES Act, legislation passed by Democrats to serve as a follow-up to the CARES Act, would expand the student loan relief. Most notably, Democrats have called for expanding the aid to all federal student loans. Currently, the suspension only applies to federally held student loans.
When the HEROES Act passed in the House, it called for the student loan payment and interest to stop until September of 2021. If the Democrats control Congress and Biden is elected President, borrowers are likely to see this extended help.
Student Loan Predictions for a Biden Presidency:If Joe Biden is elected, borrowers could see many changes to student loan policy. Take a look at some of the most likely changes.
Why the Student Loan Interest and Payment Break Could End in January 2021
If the President can extend the interest freeze, and both candidates are likely to support it, how could it end so soon?
One possible scenario involves a bit of chaos in January. Suppose for a second that Joe Biden is elected. While President-elect Biden might support extending the student loan relief, he wouldn’t take office until January 20th, 2021.
The wildcard in this event would be a lame-duck President Trump. Even many Republicans would admit that Trump’s behavior is sometimes petty or vindictive. If one of the 2020 election stories is that young people showed up to support Biden, Trump may choose not to extend the relief past the current December 31st, 2020, expiration.
At this point, we can only speculate. Everyone has their own opinions on President Trump and can judge the odds of this happening on their own.
If Biden is elected, this will be a situation to watch. As events progress, this article will be updated accordingly.
Student Loan Planning with 0% Federal Interest Rates
Until the interest rate freeze is officially extended, borrowers should be prepared for 0% interest to end on December 31st.
However, because there is a high probability that the break will stretch into 2021, borrowers should also consider how they can utilize any potential extension.
The extra time could empower borrowers who are still employed to put a massive dent in their federal debt. This site has previously suggested that saving the extra payments in a savings account is a better option than making additional payments each month. Leaving the money in savings instead of making immediate payments gives borrowers more flexibility.
The possibility of a prolonged halt on federal interest is one reason why it is probably a mistake to refinance federal loans during the Covid-19 pandemic. Refinancing after the crisis will still be an option, but for now, no private lender can compete with a 0% interest rate. However, borrowers with private loans should seriously consider refinancing. The federal interest freeze has hurt the refinance lenders, and they have aggressively cut rates to entice new customers.
Finally, all borrowers should consider their emergency fund. The payment suspension is an excellent opportunity to set aside money for a rainy day.
When Will Federal Interest Rates Go Back Up?
While there is potential for some January 2021 confusion, the odds are pretty good that the interest rate freeze gets extended.
The most likely outcome is that interest rates will probably stay at zero percent so long as Covid-19 continues to be an economic issue.