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Trump's student-loan interest waiver may not lower payments

Financial advice for the coronavirus crisis
Financial advice for the coronavirus crisis 03:42

As the coronavirus pandemic spreads across the U.S., President Donald Trump last Friday said he had a plan to help the 43 million Americans with federal student loans to repay: a waiver on their interest payments. But experts say the plan may not offer much immediate relief because monthly payments could remain unchanged. 

"Our understanding is that this will mean monthly payments won't go down meaningfully (if at all) for borrowers, but payments will go entirely toward paying down the principal of the loan," Michele Streeter, a policy analyst for the Institute for College Access & Success, a think tank for higher education, said in an email.

There's much that is unknown about the president's call for an interest waiver on student loans, such as when the waiver will end or if a loan's mix of principal and interest owed will be recalculated (or "re-amortized") at the end of the waiver period. But the bottom line is that the interest waiver is unlikely to provide immediate relief to graduates if they lose their jobs or their income is reduced as the coronavirus tramples the U.S. economy. Instead, bigger measures are needed, such as a "pause payment" on all federal student loans for at least six months, Streeter said.

To be sure, the interest waiver will help some college grads, but it's most likely to benefit those who continue to hold their jobs and can continue to manage their monthly payments through an economic downturn. Borrowers will also pay down their loans faster by putting more toward principal. 

But it doesn't help low-income workers who are already struggling to pay back their loans, noted Charlie Javice, the founder and CEO of Frank, a company that helps students fill out the Free Application for Federal Student Aid. 

This "helps upper and middle-income families," she said. "It will be the higher segment that says, 'This is the best opportunity ever because I don't have interest to pay.' A lot of MBA students and med school students should be helped."

The Department of Education said it's still working out the details of the plan, and didn't provide information about how the waiver would or wouldn't change monthly payments. The interest rate on all federally held student loans will be set to zero, a spokesman added. It won't include commercial loans or loans held by other parties, he added. 

The waiver is effective immediately, according to the education department, which said it plans to release more details as soon as it is able to do so.

Even if it doesn't lower monthly payments, the interest waiver will impact many of the roughly 43 million borrowers who owe the federal government about $1.4 trillion. Student loan debt in the U.S. now stands at more than $1.6 trillion, with the remainder held by private lenders. State loans and loans from lenders such as Sallie Mae won't be covered by the waiver, according to the New York Times.  

Borrowers who can't pay because of financial hardship may need to go into forbearance. The good news: The interest that normally accrues during forbearance will be waived, which means the borrower's balance won't grow as they put their loan repayment on pause. 

As the impact of the coronavirus deepens, there may be more calls on the federal government to take bigger action., especially if troubled industries like airlines and hotels seek multi-billion-dollar bailouts. 

On Friday, Senator Elizabeth Warren, D-Massachusetts, said canceling all student loans "would provide a massive stimulus to our economy, which has been slammed by coronavirus."

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