As part of the financial relief during the Coronavirus epidemic, interest rates on most federal student loans have been lowered to 0%. This interest rate freeze is set to expire on September 30, 2020.
Several readers have asked about the possibility of the 0% interest rate being extended beyond the current expiration date.
Given the current political climate and the projections of economists and epidemiologists, borrowers have a good chance of having the interest rate break extended.
0% Interest has a Great Chance of Being Extended
At this point, it seems almost certain that Covid-19 will continue to be an issue in the fall. Another major event in the fall will be the November elections.
No politician wants to get the blame for raising student loan interest rates a month before an election. Setting aside the health and economic concerns, the politics dictate that extending the interest rate freeze into 2021 is highly likely.
The current break in the interest rate was the result of the CARES Act. However, bipartisan legislation isn’t necessary for the 0% interest to continue. Via executive order, President Trump could extend the interest rate freeze beyond the current deadline. Though Trump doesn’t have an established track record of helping student loan borrowers, it is worth noting that on March 13th, just before the CARES Act was passed, Trump signed an executive order that was to waive student loan interest “until further notice.”
In other words, the people who will be fighting for votes in November have all shown a willingness to halt student loan interest payments. Furthermore, the interest rate freeze has been very popular with student loan borrowers and received almost no criticism.
The odds are pretty good that the interest rate break will be extended into 2021.
Projecting what will happen with federal student loan interest rates beyond the election is a bit murkier…
If Joe Biden Wins the 2020 Election
Biden has not explicitly stated how long he thinks that federal student loans should remain interest-free.
That being said, 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 the finances of student loan borrowers. Such a move would be in line with Biden’s proposed plans to make life a bit easier for federal borrowers.
The Interest Rate Freeze if Trump Gets a Second Term
Projecting Trump’s decisions in a second term is a bit more complicated.
Given that Trump has previously supported pausing student loan interest, it is certainly possible that he would indefinitely continue 0% interest until the massive unemployment due to Coronavirus ends.
However, there is a reason for concern given how dismissive that Trump has been about the severity of Covid-19. After winning a second term, he may decide that borrowers can get back to work and that they no longer need a break on the interest.
The odds of Trump extending the interset rate freeze for the duration of the crisis are probably lower than Biden, given Trump’s history of downplaying the severity of the situation. If Trump decides the crisis is over, there will be no reason for him to extend the 0% interest rates.
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 September 30th.
However, because there is a high probability that the break will stretch past the November elections, 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 extra 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 of the reasons that 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.
When Will Federal Interest Rates Go Back Up?
The CARES Act legislation says that 0% interest will end Septemeber 30th. However, there is a strong possibility 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.