The Federal Government will Probably Extend the Interest Rate Freeze (Updated)

Michael Lux Blog, Opinion 0 Comments

Editor’s Note: This article was originally published on June 29th, 2020. It has been updated to reflect the latest positions advocated by Democratic and Republican leadership as well as President Trump’s August 8th, 2020, executive order. 

As part of the financial relief during the Coronavirus epidemic, interest rates on most federal student loans have been lowered to 0%. Under the CARES Act, the interest rate freeze was set to expire on September 30, 2020.

Several readers have asked about the possibility of the 0% interest rate being extended beyond the CARES Act 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.

While there is plenty of debate over what might be included in the next Covid-19 relief bill, both parties seem to agree that the student loan interest freeze should be extended. The Democrats in the House have called for stretching it out another year. Meanwhile, Senate Republican John Cornyn voiced support for an extension from the Senate floor: “With so much economic uncertainty, we can’t allow that provision to expire. Student loan debt is a real and growing problem in our country, and families should never be in the situation where they’re sacrificing their basic needs just to make those student loan payments, especially during the time of a global emergency.”

A bipartisan group of Attorneys General has also called for an extension of the interest rate freeze.

Finally, President Trump has stated that if the parties cannot reach a broader agreement on the Covid-19 relief package, he will issue an executive order extending the student loan interest rate freeze.

The August 8th, 2020, Executive Order

President Trump issued an executive order instructing Secretary of Education Betsy DeVos to continue the CARES Act interest rate break until December 31st, 2020.

The Executive Order was signed after talks between the White House and Democrats failed to reach an agreement on another Covid-19 relief package.

There is some debate over the limits of Trump’s authority, including whether or not he can increase the unemployment insurance payments or issue a payroll tax holiday. However, the general consensus seems to be that he does have the authority to pause student loan payments.

In short, most federal student loan borrowers won’t need to make payments for the remainder of 2020.

Projecting what will happen with federal student loan interest rates beyond the end of the year 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.

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