Yesterday, Trump announced a sudden change to student loan repayment in response to COVID-19: the government is “waiving federal loan interest” until further notice.
What does this mean?
While there’s still many unanswered questions, the TLDR is: if you have student loans that are federally-held, any interest charges are subsidized by the government starting 3/13/20. Monthly payments remain the same but are (supposedly) applied directly to principal.
The loan types affected by this are:
- Direct Stafford Subsidized / Unsubsidized
- Direct Grad PLUS / Parent PLUS
- Federally Backed FFEL and Perkins
These loan types represent $1.339 trillion of the outstanding student loan principal in America! (based on the FSA data center)
Most FFEL or Perkins loans won’t be affected by the change — they are largely backed by private institutions and universities. Same deal for refinanced or private student loans.
How long will this last?
It’s unclear how long this situation will last, but we can expect the freeze on interest charges to continue until the COVID-19 situation is resolved — this could be a month, 6 months, a year or more.
The cost to the government is pretty significant here: assuming a 6% weighted average interest rate, the government is losing $6.695 billion in interest income per month.
Also, servicers will see a 2x increase in call center costs the next few months given the possible call volume. If only 5% of borrowers call to ask about this change, you’re looking at an additional 2.25 million inbound calls — more than double the monthly call center volume for federal loan servicers (via TIVAS / NFP).
Once they sniff out these costs, my spidey sense says they’ll revert or change this policy pretty quickly.
Should borrowers keep making payments?
Definitely! If you’re a student loan borrower, this does not affect your monthly payment — it may help lower the total interest paid over time but you won’t feel an immediate impact on your wallet.
If you’ve had a sudden drop in income and need help making payments, you should apply for an income-driven repayment plan so you can take advantage of the subsidies (especially if the loan is negatively amortizing).
Was this a good idea?
While this is a net positive for borrowers (slightly less interest paid over time), it’s unlikely to make much of an impact — especially in the short term. Those on income-driven plans already rely on a forgiveness event in the future, so these subsidies slightly lower their tax bill (unless they are on PSLF, where forgiveness is tax free). Most borrowers will barely feel this change, if at all.
My friend Travis from Student Loan Planner alluded to this in a recent post, but a better idea would be to offer voluntary natural disaster forbearance. This provides instant relief to people who are having trouble making payments by allowing them to pause payments for 90 days.
Servicers already have a workflow in place to process these claims and all Trump would have needed to do is declare the U.S a “disaster area”. Even better, interest doesn’t capitalize under that type of forbearance.
We need to make this type of forbearance voluntary so borrowers whose payments count towards forgiveness (PSLF, IDR, etc) can continue on their plans uninterrupted.
Voluntary natural disaster forbearance would have an immediate and tangible impact on borrowers who could pause payments in their time of need. It would also save servicers millions of dollars in call center costs.
Instead, millions of borrowers are going to call their servicers for answers and be under-serviced due to the volume.
How does this affect the Payitoff API?
We’re keeping a careful eye on the way this will be executed. Right now, student loan servicers have to build a process for applying these subsidies and it will likely take months to be applied to accounts.
We’re going to incorporate the subsidies into our system once the Department of Education announces an approximate duration for change. In reality, the effect for borrowers is relatively minor since the average repayment period is 21 years — a few months of interest subsidies means a slightly lower overall total paid.
Directionally, the guidance will remain consistent. You can still rely on Payitoff to power incredible insights on the fintech platforms millions know and love — saving the average borrower $60k+ over the life of their loans.
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