Prior to the COVID-19 pandemic, many borrowers were struggling to repay their student loan debt, with nearly two out of five (39%) outstanding loans in the federally-managed portfolio either delinquent or in default in 2019. The crisis has exacerbated this challenge, and in response, Congress acted swiftly to support student borrowers through the temporary suspension of monthly payments and interest accruals on most federal student loans as part of the CARES Act. Unfortunately, roughly 11% of federal student loans were left out of the package, along with all private loans, generating confusion and leaving millions of student loan borrowers with inadequate relief.
One major shortfall with the bill is that it failed to address more than 8 million borrowers with certain types of federal loans. Specifically, many borrowers with loans through the Family Federal Education Loan Program (FFEL) and the Federal Perkins Loan Program are ineligible for benefits under the CARES Act. What sets these loans apart is that they are not owned by the federal government. Rather, while the government guarantees these loans against default, they have been issued by private lenders, nonprofit organizations, state entities, or, in some cases, the schools that borrowers attended.
With the headlines reporting relief for federal student loans, many borrowers are likely unaware that they are still required to meet their monthly payment obligations. Moreover, borrowers commonly hold multiple loans, meaning some borrowers may have both federal loans that are suspended and other federal loans that are not, making the repayment status confusing. While FFEL borrowers have the option to consolidate their loans into one Federal Direct Loan (which would be eligible for the payment and interest suspensions), there are significant disadvantages to this approach, such as administrative hurdles and paperwork, long processing times, and potentially higher interest rates.
Several states, including New York and Illinois, have announced plans to provide relief for those left out of the CARES Act provisions, and many are calling on Congress to provide all federal loan borrowers with equal support. A bipartisan bill has been introduced to make student loan borrowers with FFEL loans eligible for the benefits under the CARES Act, and the House recently passed the HEROES Act, which would expand student loan relief to include all FFEL and Perkins Loans.
The ongoing health crisis does not distinguish between different types of loans, and neither should the government’s response. At the very least, Congress should treat all federal student loans equally in the next COVID relief bill, but it should also consider supporting borrowers in the private loan market. Improving protections for borrowers will better equip them to handle the most severe economic downturn since the Great Depression.
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