More than one million federal student loan borrowers previously at risk of facing some of the harshest student-loan collections practices, including have their wages and tax refunds seized, during the pandemic will now be included in the COVID-era pause on student-loan payments, collections and interest, the Department of Education announced Tuesday.
The roughly 1.14 million borrowers who are now eligible for the pause on payments and collections had defaulted on their debt. The federal government has extraordinary powers to collect on defaulted student loans, including garnishing Social Security benefits, tax refunds and wages. More than 800,000 of these newly eligible borrowers were at risk of having their federal tax refunds seized to repay their student loans, according to the Department.
“At a time when many student-loan borrowers have faced economic uncertainty, we’re ensuring that relief already provided to borrowers of loans held by the Department is available to more borrowers who need the same help so they can focus on meeting their basic needs,” Secretary of Education Miguel Cardona said in a statement announcing the relief.
Announcement is part of a slew of actions providing relief to some borrowers, amid pressure for more
These borrowers who were previously excluded from the pandemic-era payment pause have what’s called a “commercially-held Federal Family Education Loan.”
It’s a student debt that’s owned by a bank or commercial lender, and backed by the government. Although these loans are part of the federal student-loan program — hence, they’re subject to the government’s extraordinary collection powers — they’ve historically been left out of relief programs offered to other borrowers with other government loans, including Public Service Loan Forgiveness.
Tuesday’s announcement is one of a slew of recent actions the agency has taken to provide relief to certain groups of student loan borrowers, including some who have been scammed by their schools and some with total and permanent disabilities. These announcements come amid pressure on the Biden administration from activists, advocates to take more sweeping action in the student-loan space, including broad-based cancellation.
The Department’s announcement Tuesday only applies to borrowers with commercially-held FFEL loans who defaulted on their debt. Borrower advocacy groups have been urging the Biden administration to extend the payment pause to all borrowers with commercially-held FFEL loans. They estimate that more than 5 million borrowers have this type of loan and haven’t defaulted, meaning they aren’t eligible for the COVID-19-era relief.
These borrowers have expressed outrage, confusion and resentment over being left out of the payment pause despite having federal student loans.
Seth Frotman, the executive director of the Student Borrower Protection Center, a borrower advocacy group, called Tuesday’s action “incomplete” in a statement.
“Today’s announcement will help some borrowers who had been ignored by Washington, even as the pandemic grew and the economy collapsed,” he said. “Borrowers with commercial FFEL loans need Washington to stop drawing arbitrary lines that leave them without any protection or assistance.”
Department of Education is looking at its options for expanding the payment pause to other borrowers with commercially-held FFEL loans
A senior Department official told reporters on a conference call that the agency is still looking at its options for including commercially-held FFEL borrowers who are in repayment on their loans in the pandemic-relief program.
The official said the agency could take action on the defaulted loans more quickly because once a borrower defaults on a commercially-held loan, the Department of Education makes a payment to the lender for its losses through a guarantee agency — the middlemen that provide insurance on these loans for lenders and also collect on them.
Because of this arrangement, the Department has “more direct control” over defaulted commercially-held FFEL loans, the official said, than FFEL loans that are in repayment, which the lender still owns.
The disparate treatment of borrowers who are all technically part of the federal student-loan program is the result of years of policy decisions. For decades, the bulk of federal student loans were made by lenders and guaranteed by the federal government. During the financial crisis, the government bought some of these loans to help capitalize lenders, amid worries they wouldn’t have the funds to lend to students.
By 2010, the federal government stopped making new student loans under this lender and guarantee agency partnership. Instead, all federal student loans issued from that point forward were made directly by the federal government to students.
That created three different types of debt, all part of the government’s loan program: loans made by commercial banks and lenders and still owned by those institutions, loans made by commercial banks and lenders that were bought by the federal government — these loans were already eligible for the payment pause, but ineligible for some other relief programs, like Public Service Loan Forgiveness — and direct loans, or those owned directly by the Department of Education.
Unclear exactly when borrowers will see relief
The Department announced on Tuesday that in addition to pausing collections and interest for defaulted borrowers holding commercially-held FFEL loans,the Department will be returning any tax refunds or wages seized since March 13, 2020 to repay defaulted debt. The agency didn’t have an estimate of how much money it’s expecting to return to borrowers.
It’s also unclear how soon borrowers can expect to see this relief. It took several months after the CARES Act turned off wage garnishment as part of the initial payment pause last year for some borrowers to actually see relief.
The Department official said this time around the agency “can take steps fairly quickly,” to stop tax refunds from being seized, a process that’s done through the Treasury Department. But it’s harder to predict how quickly workers will stop having their paychecks seized.
“Wage garnishment is a little bit trickier because we really need the employers to follow our requests to have them stop garnishing,” the official said. “Were going to do our best to ask for those things to be stopped very quickly and hopefully the employers will listen right away.”
Newly eligible borrowers who defaulted during the pandemic will also have their loans returned to good standing. And the pandemic pause period will count for borrowers working towards rehabilitating their debt, a process that allows a defaulted borrower to become current on their debt by making at least nine payments in 10 months.