As the global coronavirus outbreak increasingly engulfs the United States, a mammoth public health crisis is simultaneously breeding a dire economic crisis. A panicked stock market has cratered. Economic activity has ground to a halt as workers and consumers isolate at home. The economy may well slip into recession very soon.
The Trump administration has made some belated gestures at economic aid, including promising millions of borrowers with student loan relief. But the emerging fine print shows that President Trump’s promise of “No Interest on Student Loans” is turning out to be a pointless bait and switch.
Here’s the backstory: After much cajoling, on Friday, the president finally inched toward acknowledging the grim reality of coronavirus and declared a national emergency. As one immediate step, Trump announced in the White House Rose Garden that, “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.”
The 42 million American student loan borrowers (myself among them), who owe a collective $1.5 trillion in student loans, could have reasonably assumed that this would in fact provide them with immediate help. As all borrowers know, each monthly student loan payment consists of two parts: one payment toward the loan’s principal balance, and another payment toward interest on the loan. “Waiving interest” would seem to mean that the interest portion of a borrower’s monthly payment would be temporarily eliminated, lowering their total monthly student loan bill in the process.
Indeed, that seemed to be the whole point of the initiative. Lowering student loan payments for the duration of a coronavirus-inflicted economic slowdown would give 42 million Americans more disposable cash to spend, which would inject some immediate stimulus into the economy. And it would also provide financial relief to borrowers who face reduced hours and lost pay because of coronavirus.
This would have been a positive step. Progressives like Senator Elizabeth Warren had pushed the administration to cancel student loans entirely, and Senate Democrats proposed six months of forbearance on federal student loans. But even Rep. Alexandria Ocasio-Cortez said that she was “thankful” that the administration was “taking pausing student loan payments seriously.”
But it turns out, that was all wrong — and was giving the Trump administration way too much credit. Trump’s Department of Education, led by Secretary Betsy DeVos, had different ideas for what “waiving interest on student loans” means. The New York Times reported on Saturday that according to the Department, “[m]onthly payments aren’t going to go down at all. Instead, the entire payment will go toward paying down the principal amount on the loan.”
To illustrate, let’s say you currently pay $350 per month toward your loan principal and $150 in interest. Under the Department’s implementation of Trump’s interest waiver, you’re still going to be paying $500 each month — it will just all go toward the loan’s principal. And that defeats the whole purpose of waiving student loan interest in response to coronavirus. It saps the plan of its stimulative effect on the tanking economy because borrowers are left with no new disposable spending money. It may be good for borrowers in the long term (by saving on total interest paid), but it does virtually nothing to provide the short-term relief that’s needed right now.
Importantly, it’s not even clear if the waived interest will be permanently forgiven for borrowers or if it will be added back to their loan balance once coronavirus subsides. (Alarmingly, the Times “asked about this repeatedly, but the Department of Education did not offer an answer.”) If it’s the latter, this could prove extremely costly for borrowers in the long run.
That’s all hard to square with Trump unveiling this plan as part of his coronavirus emergency response. It’s also hard to understand given that DeVos has authority under the Higher Education Act of 1965 to unilaterally cancel or reduce student loan balances altogether. It seems that DeVos is simply choosing not to.
But it’s consistent with Trump’s broader handling of the coronavirus pandemic to date. He has treated it with far more spin than seriousness, and has stood in the way of urgently-needed action every step of the way. The White House insisted that House Democrats water down their paid sick leave bill to exclude the half of all American workers employed by large corporations. And to stimulate the economy, Trump is promoting a payroll tax cut, which would give significantly more money to high-income households than to low-income ones, and would give nothing at all to those who lose their jobs because of coronavirus. A much better option would be to just send everyone cash instead, as congressmen Ro Khanna and Tim Ryan — and even Senator Mitt Romney — have proposed.
The Trump administration says it will have its ineffectual plan for student loan relief in place this week. Convinced that coronavirus is an overhyped media concoction to bring down his presidency, Trump is loath to actually meet the pandemic head-on. But as the crises inflicted by the virus deepen, superficial empty gestures by the White House like this one simply won’t cut it.