Eakinomics: Look Ma, No Impact!

Eakinomics: Look Ma, No Impact! Many were taken aback when President Trump used the occasion of declaring a national emergency over the coronavirus pandemic to announce, “To help our students and their families, I’ve waived interest on all student loans held by federal government agencies and that will be until further notice.” That sounded like a big deal. Based on the careful sleuthing of AAF’s Thomas Wade, however, it appears that the announcement is a nothingburger. The president has indicated that, as of March 13, interest payments on federal student loans will be waived. Further, this “temporary” waiver will stay in effect for an indeterminate amount of time. But the key insight is that the actual monthly payment by a borrower does not change. Instead, the entire payment is classified as a repayment of principal, but not interest. So, there is no relief for the student borrowers and no stimulus on the economy. Nor would there be if the interest payments actually really went away. As Wade notes, “With $1.2 trillion in direct loans to more than 35 million borrowers, the federal government is the biggest holder of student debt. In 2018, the government collected roughly $20 billion in interest charges as part of some $80 billion it received in overall repayments. Assuming that this 'temporary' measure lasted a full month, it would presumably involve $1.7 billion less ultimately flowing back to government – a somewhat negligible drop in the bucket of government funding.” But the really interesting point is that the president, Senator Elizabeth Warren, and others have asserted that either the president or the Department of Education has the authority to simply waive repayment of student loans. But nobody has ever demonstrated that this assertion is true. More likely, if there is a desire to meaningfully impact student loan payments – for coronavirus or any other reason – it will take an act of Congress to get it done. With no congressional action contemplated, the president’s announcement is all politics and no real impact.