Life After the Interest Freeze: Four Student Loan Situations and Suggestions

On Friday, March 13, 2020, President Trump announced the government would temporarily waive interest on federal student loans: a decision that has widespread ramifications for both financial advisors and clients across the nation. In the wake of the announcement, here are a few matters to be aware of, some other details clarification is still needed on, and what you should be doing if you are an advisor to a person or family with education planning needs.


Interest Waiver on Federal Student Loans


Situation: Although the interest accrual on federal student loans will pause temporarily, monthly payments for borrowers will remain the same. This essentially means there will be no material impact in the short-term for borrowers, but it may allow them to pay down principal quicker, shorten their overall repayment term, and reduce the overall cost of these loans.

Advisor Action: Review your clients’ student loan portfolios to better understand if this will have a material impact or not, especially if they are on income-driven repayment plans and may be planning on receiving loan forgiveness in the future. You should be able to confidently point out how the interest waiver affected them when reviewing their monthly statements for February, March, and April.


“Operationalizing” the Waiver


Situation: The interest waiver will be applied retroactively as of Friday, March 13, 2020, the date the President made this announcement. The big question is how efficient/effective will loan servicers be at actually implementing this change? I believe it will be challenging for loan servicers to operationalize this change quickly and mistakes will be made, so borrowers should be carefully reviewing their statements rather than focusing solely on their monthly payment figures over the next few months, which we already know will not be altered.

Advisor Action: Make sure your clients send you detailed loan statements for February, March, and April so you can review them to make sure the servicer applied the waiver correctly and to demonstrate to your clients your commitment to better serving them during this time of economic uncertainty.


Qualifying Loans and Refinancing Opportunity


Situation: The interest waiver applies to all student loans issued and held by the federal government, but does not include Perkins Loans or loans made under the FFEL programs that are not held by the federal government. However, we need confirmation that this waiver also applies to PLUS loans held by parents and graduate students, where the benefits of this waiver would be even more pronounced due the higher rates these loans carry. Even though the waiver doesn’t apply to private student loans, this is a great time for current borrowers of private loans to consider refinancing due to the recent lowering of interest rates in an attempt to stimulate the economy.

Advisor Action: Evaluate your clients’ student loan portfolios to understand which loans the interest waiver applies to, and if you are helping them evaluate private loan refinancing options, be aware of the federal benefits that will be lost if your clients choose to refinance as they are likely being enticed by extremely low interest rate offers in the private marketplace.


Repayment Status


Situation: The interest waiver applies to those borrowers who are in deferment, forbearance, and in various repayment plans, including income-driven repayment plans (ICR, IBR, PAYE, REPAYE), but what about borrowers who are still enrolled in school and have not entered repayment yet? It is logical that this waiver would apply to them, but either way, these students should be logging into the NSLDS site to check how their balances are being affected. Essentially, they should see a lower interest accrual for the month of March as compared to the interest accrual for the month of February.

Advisor Action: Set up time to virtually/remotely walk borrowers who are current students and their parents through the NSLDS site so they understand the mechanics of their loans better and how this temporary interest waiver will impact them when they eventually enter repayment. For those clients who are already enrolled in income-driven student loan repayment plans and work in fields that may be subject to layoffs as a result of the virus, you should be proactive in helping them reach out to their loan servicers to adjust their monthly payments, as a result of the possible sudden change in their income and their ability to pay.