Trump Freezes Student Loan Interest: The Details We Know So Far

Michael Lux Blog, News, Strategy 0 Comments

On Friday, March 13, President Trump announced that he was pausing student loan interest “until further notice” to help support a slumping economy.

At this point, many of the details are still being worked out. The Department of Education is awaiting instructions from the White House while the nine federal loan servicers are looking to the Department of Education for Guidance.

Most reports have only shared bits and pieces, so those details have been collected here to provide a more comprehensive resource.

As more information is released, this page will be updated accordingly.

When does the interest cancelation start?

The pause on federal student loan interest will be retroactive to March 13.

Because loan servicers are still awaiting instructions from the Department of Education, it may take a week or two for the 0% interest to show up on borrower accounts.

How long the free interest last?

There is no defined end date.

We have heard from a reputable source that it will be at least six months, but thus far, we have been unable to confirm that information.

While the Coronavirus continues to hamper the economy, it is a good bet that this program will continue.

Politically speaking, Trump probably won’t make changes before the November election. Suddenly raising student loan interest rates on the even of an election would likely be unpopular with voters.

Can I stop making payments?

Even though the loans will carry a 0% interest rate, borrowers should continue making payments. The existing student debt has not been forgiven or canceled.

There has been no mention of waving late fees, so failure to submit a payment could be a mistake.

Borrowers who are earning less money, or fear they cannot afford their payment, have several options for reducing the amount due each month.

What can I do to get lower monthly payments?

Borrowers on Income-Driven Repayment plans can request that their payments be recalculated immediately.

If you are earning less money, submit a new Income-Driven Request form on the Federal Student Aid website, and new payments will be calculated based upon your reduced income. Those with lower incomes and out of work will be eligible for $0 per month payments.

Shifting to a strategy point of view, Income-Driven Repayment plans such as IBR, PAYE, or REPAYE are preferable to a deferment or a forbearance. This is because the IDR plans are eligible for the various federal student loan forgiveness programs.

If payments on an income-driven repayment plan are unaffordable, a deferment or forbearance is a viable option. Given that there will be no interest charges, these tools will truly pause student loan payments.

Do I need to ask for a Forbearance or a Deferment?

Borrowers that want a forbearance or deferment will need to request one with their loan servicer.

Most loan servicers can process the request over the phone, and they are usually good for six months.

What will happen with my current automatic payments?

Pausing interest and pausing payments are two different items.

Unless the Trump Administration makes further changes, it looks like monthly payments will remain the same. The big difference is that the loan will no longer be accruing interest, so payments will lower the principal balance.

Note on Accrued Interest and Late Fees
Borrowers with late fees or accrued interest from before the interest pause will see their payments applied to these items before the principal balance is reduced.

Are private loans eligible for 0% interest?

Unfortunately, the interest freeze will only apply to federally held loans.

Borrower private loans will have to work with their loan servicer if payments are unaffordable.

Private loan borrowers who have a solid credit score an income may be able to refinance their loans at a lower rate. The economic turmoil has caused interest rates with refinance companies to approach historic lows. Choosing a 20-year refi term would also be a strategy to lower payments during a tough financial period.

What about FFEL and Perkins Loans?

At this point, the interest freeze question is a maybe for FFEL and Perkins loans.

The pause applies to loans “directly held” by the federal government, but the Federal Family Education Loan Program (FFELP) and Perkins loans may work differently.

For example, some FFEL loans, though federal loans are technically held by private lenders. These loans are guaranteed, or backed, by the government, but the government didn’t actually lend the money.

This is one of the questions we expect to be definitively answered in the coming days.

If these loans are not eligible for the 0% interest rate, federal direct consolidation may be a solution for some borrowers, but many factors must be considered for federal consolidation.

What if I just refinanced my Federal Loans?

The pause on federal interest was a pretty big surprise. Borrowers currently refinancing their federal loans with a private lender may wish to stop the process.

While there is no way to undo a federal refinance with a private lender, the point of no return is very late in the process. Borrowers without a finalized refinance loan should contact their lenders as soon as possible to put a stop to the process.

Could the interest freeze delay when I qualify for student loan forgiveness?

Because interest is being frozen, rather than payments suspended, borrowers in pursuit of programs like Public Service Loan Forgiveness should not be delayed.

However, those who opt for a deferment or forbearance will also pause the clock on forgiveness.

The big question here is whether or not automatic payments will be made. We suspect they will continue, but it is unknown at this point. If your loan servicer suspends automatic payments, it will be important for the people chasing forgiveness to continue making payments manually. Be sure to call your loan servicer to verify that any manual payments will still count towards the required payment for PSLF.

What is the best repayment strategy during the interest rate freeze?

Suspending interest charges on student loans presents a few opportunities for borrowers.

Those still receiving a steady paycheck may choose to continue making payments as usual. Because there will be no interest charges, they will be able to put a dramatic dent in their student loan balance.

Another option for borrowers would be to use this opportunity to build up an emergency fund. Given the current economic uncertainly facing the United States, having some cash set aside for the unexpected could prove to be a smart move.