On Friday, March 13th, 2020 President Donald Trump declared a national emergency in response to the Coronavirus pandemic, a jarring day for all Americans and the world. During this speech one item, in particular, jumped out and took me by surprise.
“I’ve waived interest on all student loans held by federal government agencies, and that will be until further notice,” Trump said during an appearance in the Rose Garden.
I immediately knew that the optometrists and optometry students would have questions about how the White House’s stimulus package, specifically the waiving of interest of optometry school federal student loans, would affect them, and so I wanted to provide a quick article to help add context.
What was the announcement?
After the speech, a spokesperson from the Department of Education clarified that under this new policy, any borrower with a federal loan will see that loan’s interest waived until the temporary policy ends. This includes those in income-driven repayment and in forbearance. Interest will be waived automatically.
The spokesperson could not say how long this policy will be in place, but did say that the policy will be put into place over the week following the President’s speech on March 13th.
Payment on federally held student loans has been suspended for 60 days, per President Trump's announcement at the March 20 daily briefing.
On March 20th, the Department of Education released information on how this process would work. While the loan interest rates are automatic, borrowers should contact their loan servicers for information on suspending their loan payments.
What does this mean for optometrist student loans?
So first off, this announcement is very clear: there is likely to be a waiver on federal student loan interest that loan holders will notice in the coming days. This includes all Federal Direct Student Loans and Stafford Loans, which account for $1.25 trillion in federal student debt owed by 35.3 million borrowers, according to data from the Federal Student Aid Office.
Because most optometry school loans are federal and not private, this means that optometrists and optometry students are in luck!
A spokesman for the department said all federally held student loans qualify, which would suggest direct loans, Parent Plus, and Grad Plus loans are all eligible. However, most FFEL Loans and Perkins loans are held by private loan servicers and do not qualify.
We’re not sure when or for how long, but the White House should be issuing a statement on things over the next few weeks. What we know now (according to CNN) is that you won’t have to apply for this relief—it will be applied automatically to all outstanding loans owned by the federal government. This suggests that while interest is waived automatically for all borrowers, payments to the principal balance are not. If the principal balance were waived, that would be more like a Federal Student Loan forgiveness or subsidy program, which this is certainly not (at the moment.)
Dat Bui, OD of ODs on Finance suggests that optometrists with federally held student loans might see themselves placed in a forbearance period, meaning that their payments are paused for 90 days if they're in a location that's been declared "a national disease area." Depending on your situation, this might not be a good thing for you, so check with your lender.
Why is this happening?
Due to the pandemic caused by the COVID-19 virus, the CDC and global community of scientists have agreed that “flattening the curve” is the best way to make the biggest impact. To flatten the curve, you need people to be quarantined and not engaging in normal business or consumer life so that this virus doesn’t transmit to more people.
When this happens the economy grinds to a standstill, because a variety of industries—most notably the airline, travel, hotel, and restaurant industries—don’t receive any revenues. This also goes for hundreds of other smaller but still critical industries. Without revenues, these companies ask employees to work without pay for an unknown amount of time or lay off workers altogether. They do this because they cannot afford to pay people to stand around and do nothing. If they can’t bring in revenue, they can’t pay their expenses, which include employee payroll.
Clearly, this can easily spiral out of control—fast—so the Federal Government and the Federal Reserve need to step in and stimulate or bail out this troubled economy.
How the Federal Funds Rate effects your student loans
Once again, this means that the global economy grinds to a standstill. When this happens, the Federal government and the Federal Reserve utilize a monetary stimulus to support companies and individuals during dire financial circumstances.
Here’s how the Federal Reserve is able to do this.
The Federal Reserve goes ahead and manipulates the federal funds rate, sometimes referred to as the fed funds rate, which is the interest rate at which the Federal Reserve lends money to banks, who go on to lend us (both consumers and businesses) money.
The fed funds rate changes, like the one that just happened on March 13th, 2020 when the Fed slashed interest rates to 0%, affect pretty much all forms of credit. Credit lines, credit cards, mortgages, savings accounts, and personal loans are directly affected, and bond and stock prices are indirectly affected.
You guessed it: your student loans are also affected by the fed funds rate.
But here’s the caveat. This rate change will only affect your existing student loans if they have a variable interest rate; it will not affect a fixed-rate student loan. Your optometry student loans are likely fixed-rate loans, and as such will not be affected. They were fixed and locked in when you took them out, so there’s nothing you can do here. Yet if you take out new loans next year, these will likely be affected by this fed funds rate interest rate change.
Lawmakers have already met to determine how costly a student loan taken out in the 2020-2021 school year will be. Now, however, a student seeking a federal student loan for this upcoming 2021 - 2022 school year could end up paying much less interest than expected, as the fed funds rate is likely to remain at 0% for the foreseeable future. This means that this announcement will have a much greater effect on optometry students seeking loans, not those currently paying off fixed-rate loans.
How President Trump's executive order effects your student loans
What I described above is how the fed funds rate will impact future student loan interest rates, but it doesn’t describe the unique circumstance that President Trump described on March 13th, 2020 when he said: “I’ve waived interest on all student loans held by federal government agencies, and that will be until further notice.”
Once again, we haven’t actually seen this show up in the wild yet, but likely optometrists and optometry students can call their federal loan lenders to ask how this will work. Just call and ask them about how “The Student Loan Interest Waiver in response to the Coronavirus” will work.
My guess is they will respond by saying: “If you log into your account, you’ll notice that interest is not currently accruing on your student loans. We’ll notify you of any changes.” My suggestion is that you ask them their opinion on what you should do in this unique circumstance.
I don’t want to offer too much advice on what to do here, but you really need to look at your specific financial situation and goals. You can use our optometrist student loan calculator to understand your debt amount and plug in different scenarios. One thing is for sure: if you continue to pay your loans, or even pay more towards them while interest is being waived, then you will save money over time. (This is just basic math.)
This can be a great time to make a dent in your loans, since the money you would have put towards interest you can now put towards principle instead, paying off your loans faster and spending less money overall on your debt. On the other hand, if you or your family are in extreme financial hardship due to the Coronavirus pandemic, you may want to use the money you would have put towards this interest and/or principle and use it to cover your essential necessities like food, shelter, and healthcare.
Please, whatever you do, don’t see this as an option to not pay off your loans and instead buy yourself non-essential items. The economic climate is extremely uncertain and volatile, and during this time your finances require an even more responsible approach than usual. During times like this, you want to cut spending and keep cash reserves and pay down high-interest debts, like on your credit card, that will be a huge burden in the future.
We will update this article as more information becomes available. Please bookmark it!
CovalentCareers is committed to supporting optometrists and optometry students during the Coronavirus pandemic. For more optometry-specific resources and information, visit our Optometry COVID-19 Resource Center.