Millions of Federal Student Loan Borrowers Lack Access to Immediate Repayment Help

The novel coronavirus has already taken a significant societal and economic toll, and the long-term effects on families’ balance sheets are only beginning to be understood. Importantly, the spread of COVID-19 has created challenges for student loan borrowers and servicers, the companies hired by the U.S. Department of Education to collect and help borrowers manage their payments.

Many borrowers, for example, are facing temporary or long-term loss of a paycheck. They could become sick or need to care for ill family members. Servicers, meanwhile, are experiencing coronavirus-related disruptions such as staffing shortages and high call volumes from affected borrowers.

The federal government has taken quick steps to provide support, but millions of borrowers are finding that they are not eligible for programs intended to ease their financial troubles. In many cases, that is because of the kind of loans they have.

In response to the emerging pandemic, the Trump administration acted in March to specifically help borrowers. Congress, meanwhile, passed a bipartisan coronavirus relief bill that, among its many provisions, provides additional resources to the office of Federal Student Aid, which oversees most federal student loan servicers, and repayment assistance for federal student loan borrowers.

The legislation automatically paused payments and interest charges for borrowers repaying their loans and stopped collection efforts through Sept. 30, 2020, for those who have defaulted. But many cannot take advantage of these provisions because the protections in the stimulus bill are available only to borrowers whose loans are owned by the Department of Education. Although that includes all with direct loans, many with older loans from discontinued lending programs are excluded.

For example, some Federal Family Education Loan (FFEL) Program loans are “commercially held,” meaning they are owned by private banks and lenders but insured against default by the Department of Education. Approximately 6 million of the 43 million borrowers with federal loans—with a total value of about $140 billion—fall into this category. Additionally, 1.9 million borrowers owe around $6 billion in Perkins loans, which are federally subsidized but generally owned by colleges. These loans also are not eligible for the new protections.

Borrowers with commercially held FFEL Program loans may be able to get assistance from their lenders, but it is neither automatic nor as comprehensive as that provided by the coronavirus relief bill. That means these borrowers may face an increased likelihood of missing payments or defaulting on their debt.

In addition, inconsistencies in repayment terms for borrowers with federal loans could make interactions between borrowers and servicers more complex at a time of disruption and distress—and in a system already in need of streamlining. In forthcoming focus group research by The Pew Charitable Trusts, borrowers speak of difficulties navigating the repayment system when the economy was functioning much better than it is now. A growing body of research from federal agencies, academics, think tanks, and advocates reflects similar challenges.

Unequal access to repayment assistance drives negative outcomes

Although borrowers have different types of federal loans with different terms, many experience comparable barriers to repayment. In addition, borrowers’ loans are managed by the same servicers, and they are similarly vulnerable to problems attributable to the coronavirus. Millions have seen their jobs evaporate, and many may now be sick or need to care for family members who are ill.

Importantly, those borrowers with commercially held FFEL Program loans did not choose to have their loans held by a private entity. In fact, some also have federal loans held by the Department of Education. Providing repayment protections based on the holder of the debt may leave some borrowers confused about whether payments are due on some or all of their loans. If borrowers think they are eligible for new protections but are not, they may fail to make payments and could become delinquent or default on their loans.

Servicers of student loans also face significant pressures at a time when these borrowers most need their assistance. These companies may be experiencing staffing disruptions, limited call center availability, or other problems while many borrowers are seeking their help.

Whatever the reason, failing to repay a federal student loan can have serious financial consequences for borrowers, regardless of who holds the debt. They can face collection fees; wage garnishment; money being withheld from income tax refunds, Social Security, and other federal payments; damage to their credit scores; and even ineligibility for other aid programs, such as help with homeownership. Meanwhile, the risk is more limited for lenders. When borrowers with commercially-held FFEL Program loans default, the Department of Education pays loan holders almost the full value of the defaulted debt. 

Extending the same repayment assistance to all federal student loan borrowers would involve additional considerations and complexity—and require alternative solutions. For example, holders of commercially-held federal student loans may want to provide protections to borrowers similar to those in the stimulus legislation, but they may be limited by investment and contractual agreements.

Still, Congress has a history of helping borrowers weather difficult economic times and can take additional steps to make sure all federal borrowers have access to flexible, affordable repayment options. For example, industry groups and consumer advocates have urged lawmakers to provide  interest subsidies, among other benefits, for those with commercially-held FFEL Program and Perkins loans in future legislation. Such action would help many vulnerable Americans avoid delinquency or default during this period of national and personal distress.

Sarah Sattelmeyer is project director, Rich Williams is an officer, and Spencer Orenstein is a principal associate with The Pew Charitable Trusts’ project for student borrower success.