As part of the financial relief during the Coronavirus epidemic, interest rates on most federal student loans have been temporarily lowered to 0%. This interest rate freeze has been extended several times already and is now set to expire on September 30th, 2021.
The most recent extension comes via an executive order from President Joe Biden on his first day in office. The pause on payments and interest is expected to extend until at least September 30th, 2021. 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 as long as Covid-19 impacts the economy.
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.
January 20, 2021 – President Biden extends the payment and interset pause on his first day in office. As part of a series of day one executive orders, student loan borrowers won’t need to make payments or be charged interest until October 2021 at the earliest.
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.
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 late 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 September 30th, 2021.
However, because there is a probability that the break will stretch further into 2021 or even 2022, 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.
Given that there is now a vaccine, the hope is that by October 2021, we will have turned the corner. If we haven’t, additional extensions on the student loan help are likely.