On Friday, March 13, President Donald Trump announced he would freeze student loan interest. This action is part of a package of emergency executive actions designed to mitigate the economic fallout as a result of the Coronavirus outbreak. The unprecedented move will provide relief to the 42 million-plus Americans who owe over $1.5 trillion in federal student loans.
Since this announcement, there has been much confusion about what this freeze actually means for student loan borrowers. To reduce confusion, United Texas Credit Union has answered some common questions about the freeze.
What does a student loan interest freeze mean?
With the president’s student loan freeze in effect, no further interest will accrue on certain federal student loans until further notice. Borrowers will only be responsible for paying the principal payments due on the loan for as long as the freeze is in effect.
Which loans are frozen?
The interest freeze only applies to student loans that the U.S. Department of Education and its contracted student loan servicers hold. Loans issued by private borrowers are not subject to the freeze (unless indicated by the lender). In addition, some federally guaranteed student loans, including federal Perkins loans and FFEL program loans, may not be subject to the freeze if they are not held by a federal government agency.
How long will the freeze be in effect?
As part of the administration’s relief efforts during the Coronavirus outbreak, the freeze is temporary. The administration will implement the freeze automatically and continue it until the policy changes. The administration has not announced an end date for the freeze.
Does the freeze include any student loan payment relief?
The freeze does not include any student loan payment relief. College graduates who are paying off their student loans must continue to make their monthly payments as usual. The move only affects the interest on qualifying federal student loans going forward.
How does the freeze affect borrowers who have already accrued a significant amount of outstanding interest?
Payments made during the freeze will apply to loan principal only after borrowers pay all outstanding, non-capitalized interest.
If the borrower has defaulted on their loan, the “forced collections” implemented in case of default will continue as usual. This includes the borrowers being subject to wage garnishment, offset of Social Security payments, and automatic confiscation of federal and state tax refunds.
Trump’s interest rate freeze will halt balance growth and reduce the cost of repayment for some borrowers; however, it will not provide direct student loan relief for borrowers who are struggling to meet their loan payments due to lost income because of the Coronavirus outbreak.
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