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 extends until at least September 30th, 2021.
The interest rate and payment freeze is extremely popular with borrowers, received bipartisan support, and faced little criticism. As Covid-19 numbers fall, borrowers should expect repayment to resume. However, several reasons might justify continuing the freeze beyond October 2021 and into 2022.
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.
Latest Update: The Department of Education is Open to Further Delays
In June 2021, testimony before the Senate, Secretary of Education Miguel Cardona said that conversations about extending the freeze were ongoing. His remarks to the Senate were consistent with previous statements that further extensions were possible.
Cardona explained that “we’re going to always take the lead from what the data is telling us and where we are as a country with regards to the recovery of the pandemic.”
The big takeaway for borrowers is that stretching the payment freeze past the current September 30 expiration is possible but far from a certainty.
Why Would the Biden Administration Extend the Student Loan Relief into 2022?
When Covid-19 numbers were terrible, and the pandemic was devastating the economy, justification for the interest freeze was straightforward. In the summer of 2021, things are less clear. Millions of Americans are vaccinated, and infection rates are falling. Eventually, the student loan help will end.
However, several practical factors might cause the freeze to last longer than anticipated.
- It is better to start repayment late than early. Borrowers face a variety of hardships and unique circumstances related to the pandemic. There isn’t a date that will work for everyone. Some borrowers are ready to restart repayment now. Others continue to struggle. Starting repayment too early could devastate many Americans. A later start has far less severe consequences.
- Loan servicers need time to prepare. When the pandemic started, many loan servicers cut staffing levels. The expectation is that in the first month of repayment, servicers will get more calls than what they receive in a typical year. The restart might get ugly for borrowers and servicers. Unprepared servicers might necessitate a final payment freeze extension.
- Lots of data to consider. Cardona talked about following the lead from the data. Many assumed the data in question was infection rates, but there are many other relevant numbers. For example, what is the state of the economy? Even if the economy is strong, how are borrowers doing? Don’t assume that dropping infection rates and increased vaccination numbers mean an end to student loan help.
Borrowers should expect more clarity by late August. If payments resume October 1, that means bills must get sent out weeks in advance. In addition, servicers need to hire and train additional staff. Restarting is complicated and requires plenty of notice to do it right.
An additional extension is still probably a long shot at this point, but if we get to September and haven’t heard anything definitive, more help could be on the way.
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.