WASHINGTON — Building on efforts to expand student debt relief, the Education Department said Tuesday that it will extend the suspension of payments to 1.14 million borrowers in default on federal loans held by private companies.
“Our goal is to enable these borrowers who are struggling in default to get the same protections previously made available to tens of millions of other borrowers to help weather the uncertainty of the pandemic,” Education Secretary Miguel Cardona said in a statement.
While 95% of people with federal student loans have had their payments automatically paused for the last year, millions of others with federal debt have been shut out of the moratorium. Those borrowers have been excluded because their loans, originated through the defunct Federal Family Education Loan (FFEL) Program, are held by private companies.
People with what are known as commercial FFEL loans are still being subjected to collections and wage garnishment when they default. And the economic upheaval caused by the coronavirus pandemic has led to more than 100,000 of these borrowers falling severely behind on their debt, according to the Education Department.
With Tuesday’s announcement, the department will halt now collections on people who have been behind on their commercial FFEL loans for nearly a year. Among those borrowers are about 800,000 people who were at risk of having their federal tax refunds seized to repay a defaulted loan. All relief is retroactive to March 13, 2020, when President Donald Trump declared a national emergency.
The department will return any tax refunds seized or wages garnished over the past year. The agency has struggled to turn off the collections system, waiting for employers to cease garnishment while borrowers continued to have their paychecks shorted. A senior department official said the agency will urge employers to act quickly.
People who have made voluntary payments on any of their defaulted commercial FFEL loans since the start of the pandemic can request a refund. Interest paid on these loans will also be refunded. Each month in which the debt payments are suspended will count toward student loan rehabilitation, a federal program that erases a default from a person’s credit report after nine consecutive payments.
A year ago, the Trump administration gave borrowers the option of postponing payments for at least 60 days as the coronavirus pandemic battered the economy. Congress later codified the reprieve in the stimulus package, known as the Cares Act, and made it automatic. The Trump administration twice extended the moratorium, and President Joe Biden continued it through Sept. 30.
From the outset of the payment and collection pause, consumer groups have pleaded with the department and congressional lawmakers to provide all federal borrowers relief. Policymakers have said the federal government’s authority over debt owned by private entities is limited.
The Education Department said it has direct control over defaulted commercial FFEL loans because of the way the debt is handled. When someone defaults on those loans, the federal government has to reimburse the owner and essentially acquires the loan.
The federal government holds some loans in repayment from the FFEL program, and that debt has been eligible for the suspension. The distinction within the FFEL portfolio is a consequence of the programs demise.
For years, the federal government was essentially a silent partner in a $60 billion program. Private lenders used their own money to finance the loans, but behind the scenes, the government paid a portion of the interest to make the debt more affordable. And to entice lenders, the government guaranteed the debt, taking on the risk of default. But after lenders were caught stealing from the government and paying off financial aid officers, the FFEL program lost favor on Capitol Hill.
The 2008 recession threatened the liquidity of private lenders, though, so the Education Department swooped in to buy some of their FFEL loans to keep the program going. By the time the Obama administration moved solely to direct lending in 2010, the portfolio of bank-based loans had been divided up among the department and companies such as Navient and Nelnet.
While advocacy groups welcomed the Education Department’s decision Tuesday, they continue to urge the Biden administration to help an estimated 5 million other people who are still making payments on their commercial FFEL loans.
“This is not enough,” said Persis Yu, a staff attorney and director of the National Consumer Law Center’s Student Loan Borrower Assistance Project. “The millions of FFEL borrowers who have not yet defaulted but who may be struggling to make their student loan payments often at the expense of other vital necessities need relief.”
In a letter NCLC and Student Borrower Protection Center sent the department in February, the advocacy groups estimate that the typical commercial FFEL borrower probably will make $5,700 in federal loan payments by the time the moratorium ends in September. That’s about four months of rent for the median two-bedroom apartment in the country, or over 13 months of the average utility bill.
“Borrowers with commercial FFEL loans need Washington to stop drawing arbitrary lines that leave them without any protection or assistance,” said Seth Frotman, executive director of the Student Borrower Protection Center. “The Department has the legal authority to protect all federal student loan borrowers during the pandemic and provide real relief — it is long past time for them to use it.”
Tuesday’s announcement from the Education Department is the latest step the Biden administration has taken to support student loan borrowers. The administration on Monday waived income reporting requirements for disabled borrowers approved for debt cancellation. It also scrapped a Trump administration plan earlier this month to give partial debt relief to students defrauded by their colleges.