Yesterday, the Trump Administration unveiled its “student loan interest waiver,” which the President included in his Coronavirus Emergency Declaration last week. Since the federal government holds the bulk of student loan debt issued through Stafford, PLUS, and legacy FFEL student loan programs, his promise sounded like a benign idea that will provide temporary stimulus in the form of reduced out of pocket monthly loan payments for primarily younger Americans.
The Department of Education’s “waiver” will not lower monthly payments but will instead keep payments the same and apply the interest payment to the principal. For borrowers facing layoffs or furloughs, reduced hours, and lower income, this “waiver” will not create an out-of-pocket stimulus—the only benefit will be years away with an earlier principal payoff.
There is something very wrong with this picture for student borrowers, given that the federal government is selling Treasury notes at record low rates—10-year yields have hovered around 1% for the past week—which has set off a stampede of refinancing for home mortgage loans. The Administration and Congress can and should do much more than a temporary student loan interest payment holiday, whose benefit will not materialize until years from now.
The Trump Administration and Congress should focus on permanently writing down student loan interest rates through legislative actions. Unlike all other forms of consumer debt, federal student loans by law cannot be refinanced. Some of us in Congress have been advocating for such a commonsense revision of student loan policy for some time.
Senator Elizabeth Warren and I have been bicameral sponsors of the Bank On Students Emergency Student Loan Refinancing Act for the last several Congresses, which would do precisely that. Our bill would allow student debt holders to take advantage of the economy’s low interest rate environment to write down interest payments with Department of Education for all student loan debt, including private student loans. In 2016, the Congressional Budget Office calculated that at that time, our bill would put $58 billion back in the pockets of student loan borrowers, who could use that money for other urgent needs, just like middle class families do when they refinance home mortgages.
If the Warren-Courtney bill—minus its proposed pay-for tax on the ultra-wealthy—passed in our current fiscal environment, based on 10-year Treasury note yields last week, the benchmark interest rate for undergraduate student loans would be as low as 2.8 percent—a huge bargain for those with legacy student loans, which for undergraduate education can carry interest rates of up to 7 percent. That spread will produce even greater savings than the 2016 estimates.
Such an approach will provide both immediate stimulus for student loan borrowers like the President proposed, minus the snapback of higher legacy interest rates once the disaster declaration expires. The 14 million homeowners who are expected to take advantage of lower mortgage interest rates in the coming weeks from the drop in Treasury bond rates are doing so to get both a short-term boost in lower monthly payments and a long-term cut in debt. They are not seeking a short-term interest payment holiday. Giving student loan borrowers the same opportunity to benefit from the U.S. Treasury windfall is simple fairness and should be part of the economic battle plan to counter the coronavirus recession.
President Trump opened the door to the long-overdue need to write down student loan interest rates—Congress and the Administration should make it happen now.