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 January 31st, 2021. The Biden transistion team has indicated that Biden will be extending the interest freeze and payment suspension. Full details have not yet been released.
Due to bipartisan support and the ongoing pandemic, the odds are very good that the government will extend the payment and interest freeze well into 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.
December 4, 2020 – Secretary of Education Betsy DeVos extends the pause an additional month. The feared chaos in January of 2021 won’t happen. The Department of Education won’t start collecting student loan payments until February 1, 2021, at the earliest. Notably, Joe Biden will take office on January 20th, 2021.
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, the President could extend the interest freeze regardless of what happens in the House and the Senate.
(Update December 21st, 2020: It looks like the interest freeze will not be extended via stimulus legislation. However, an extension via executive order is the most likely outcome.)
What Happens When Joe Biden Takes Over on January 20th, 2021?
Biden has not explicitly stated how long he thinks that federal student loans should remain interest-free.
His transition team has already indicated that he will be extending the 0% interest and payment forbearance.
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. Thus, there is democratic support to extend the freeze until at least September.
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.
When Will the Student Loan Interest and Payment Freeze End?
Given the broad bipartisan support for the program, it is likely that the forbearance will last until at least mid-2021.
There are a couple of events that could cause the payment suspension to end.
- Political Support Fades – It isn’t likely, but if the student loan relief becomes controversial, it could come to an abrupt end.
- A Vaccine Ends the Covid-19 Pandemic – This would be the ideal outcome. Given the recent results on some of the reported vaccines, there is a reason for optimism.
The good news for borrowers is that the student loan help will probably continue as long as the virus remains an issue.
The bad news for student loan borrowers is that there is no guarantee.
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 January 31st, 2021.
However, because there is a high probability that the break will stretch further 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?
Projecting the time when Coronavirus is no longer an economic hardship for student loan borrowers is probably more of a question for an epidemiologist.
The best guess of this student loan borrower is that rates will go back up in July of 2021 at the earliest.