On Friday, President Trump announced a temporary waiver on student loan interest for federal student loans owned by the federal government. There is no clarity yet on how this will be implemented and what practical effect the waiver will have on borrowers. The Department of Education has not yet issued guidelines or details, but apparently interest will not accrue on loans from sometime last week until an undetermined point in the future.
There are many details to be sorted out. However, for the policy to have an immediate impact on the cash flow of borrowers there will need to be payment reductions. This will allow money to flow directly into the economy, which are the stated goals of the recent efforts by the White House to lessen the impacts of the coronavirus pandemic on the United States economy.
Numbers specific to this situation are difficult to come by, but we have some “back of the envelope” numbers to quantify the impact. There are a lot of different types of loans and borrowers, including those in forbearance already or in default or with interest capitalizing. Looking at your average college graduate borrower with about $25,000 in loans, it comes up to about $100 per month in interest savings at 4.5%. If you look in the aggregate and take the $728 billion in direct loans currently in repayment, that comes to $2.75 billion per month. Add in some more for other types of federal loans in repayment and there would be around $3 billion dollars per month immediate economic impact. For those in school, forbearance, deferment, or default there would be an additional $2-3 billion per month benefit, but that wouldn’t be felt until some time in the future when and if repayment starts.
From the chart below, you can see that this could benefit all age groups as there is a surprising amount of debt owed by older borrowers.
We await the details.