WASHINGTON, DC – MARCH 13: US President Donald J. Trump holds a press conference on COVID-19 in the … [+]
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In response to the coronavirus pandemic, President Trump announced that he would waive interest on student loans held by federal government agencies. The rationale behind such a waiver is to put extra money in the pockets of student loan borrowers. But the way the policy is structured, it will provide little immediate relief to borrowers, while potentially racking up costs after the pandemic has subsided.
The Department of Education had not released any official guidance regarding the student loan interest policy as of the time of writing. But New York Times finance columnist Ron Lieber reports that monthly student loan payments will not decrease at all as a result of the policy, based on conversations with Department spokespeople. The president of an association of student loan servicers said the same thing in an interview with Inside Higher Ed’s Kery Murakami.
The interest waiver will keep student loan interest from accumulating as long as the policy is in effect, but monthly payments will remain the same. This will keep balances from rising while the waiver is in place, but most borrowers will only see a benefit once they are close to paying off their loans.
How would this work? Let’s say you have $15,000 left on your student loan, which has a 5% interest rate. You make payments of $283 per month. Roughly $60 of that goes to interest, while the rest goes to principal. At that rate, you will fully pay off that loan in five years, and your payments will total $16,984.
Now let’s imagine that the federal government waives your interest for the next three months due to the coronavirus pandemic. You’re still making a monthly payment of $283, but for three months all of that will go towards paying down principal rather than interest. Because of reduced interest costs, your payments will total $16,750.
That equates to savings of $234, which isn’t meaningless for many households. But the borrower only realizes those savings five years from now, when he pays off the loan. That’s not much help to borrowers facing a cash crunch now due to the pandemic. But it will cost the federal government money down the road, after the pandemic is hopefully over.
The student loan interest waiver might make borrowers facing financial stress feel better about putting their loans into forbearance. In forbearance, borrowers don’t have to make payments, but regularly scheduled interest still accrues. Watching your balance rise can be disheartening, so the interest waiver might nudge borrowers to make this choice. But the policy still provides no cash relief today, since most borrowers were always eligible for forbearance, pandemic or no pandemic.
The student loan interest waiver fails to help struggling borrowers now, even though the federal government will still incur costs from lost interest revenue in the future. That makes it a poor response to the financial stresses the coronavirus pandemic has placed on American households.
Even if the Trump administration did find a way to lower monthly payments today, it would still be a poorly-targeted response to the pandemic. Student debt is concentrated among higher-income households; rich families hold about $3 in student debt for every $1 held by poor families. But lower-income people, who are more likely to work in service-sector jobs impacted by the pandemic, need financial help the most.
A better way to help people whom the pandemic has hurt financially is to send them cash directly, rather than providing delayed and inconsistent relief through the student loan system. Fortunately, the White House announced on Tuesday afternoon that it was working on a plan to do just that. President Trump should reconsider his flawed student loan interest waiver and instead spend the money on direct relief for the families who need it most.