The CARES Act and subsequent executive actions have provided a much needed reprieve to millions of student loan borrowers during the COVID-19 crisis. Unfortunately, millions of borrowers have been excluded from obtaining relief. Last week, the U.S. Department of Education took some steps to help some of those borrowers by extending the payment suspension to all defaulted Federal Family Education Loan (FFEL) borrowers (regardless of who holds the loan) and by temporarily waiving the paperwork requirements for borrowers who received a disability discharge. These actions are small common sense improvements to the pandemic relief already available to other borrowers. Unfortunately, millions of borrowers are still in need of relief.
What does this mean for borrowers with Commercial FFEL loans?
Since the pandemic began, commercially-held FFEL loans were excluded from the payment suspension available to other borrowers; those borrowers have struggled for over a year with their monthly loan payments (to determine what kind of loan you have, see this post) Others have unexpectedly found themselves excluded from relief the Department of Education (ED) previously granted.
For defaulted borrowers with ED-held loans, the payment suspension stopped collections activity– including halting wage garnishment, tax refund offset, and social security benefit offset. But defaulted FFEL borrowers with loans held by commercial lenders or guaranty agencies excluded from the payment suspension were still vulnerable to collection activities.
Last week the ED clarified that the payment suspension would apply to commercially-held FFEL loans in default, and that it was refunding the amounts borrowers involuntarily and voluntarily paid towards these loans since March 13, 2020, and retroactively extending the 0% interest rate provided to ED-held loan borrowers for the pandemic-period.
Furthermore, ED will also fully reverse the default of any FFEL borrower who went into default during the pandemic. The guaranty agencies that hold those loans will assign them to the Department and those borrowers will get the benefits of the payment suspension.
Borrowers who have commercially-held FFEL loans that are not in default may be asking, “What do I do with this news?” because their loans remain in repayment status. Some borrowers have asked whether they should default on their loans in order to get the payment suspension.
Because it takes at least 270 days to default on a federal student loan, borrowers cannot access this relief by simply failing to pay next month’s bill. The payment suspension is set to expire in September 2021, so borrowers who stop paying would be taking an ill-advised gamble on their student loans. Additionally, it is unclear how quickly ED will act once new loans fall into default, meaning that in the interim borrowers could be hounded by debt collectors and be left with negative entries on their credit reports. As a result, for most borrowers with commercially-held FFEL loans, this announcement will provide no relief. Until ED acts, these borrowers will continue to struggle making each month’s student loan payment.
What does this mean for borrowers with disabilities?
The Total and Permanent Disability Discharge (TPD) program provides loan cancellation to borrowers whose disabilities meet certain criteria. However, following the loan discharge, borrowers must complete paperwork for three years to demonstrate they are disabled and fall beneath the income thresholds. During the pandemic, over 40,000 of those borrowers have had their loans reinstated because of paperwork noncompliance.
ED announced that it is reversing the loan reinstatement for borrowers whose loans were cancelled under the TPD program but who had failed to maintain the monitoring paperwork necessary to maintain their discharges. ED is temporarily waiving the income monitoring requirements for the remainder of the pandemic.
Similarly, student loan borrowers with disabilities may wonder if additional relief from the needlessly burdensome Total and Permanent Disability discharge process is coming. Advocates have called on ED to streamline the discharge application process and make it easier for borrowers with documented disabilities to obtain relief. Hopefully last week’s small step towards bureaucratic change indicates that ED will finally remedy the flaws made plain by the issues that have arisen during the pandemic.