Related Topics in the Ref Desk: Discharge, cancellation, forgiveness; Forbearance
By Hugh T. Ferguson, NASFAA Staff Reporter
Individuals who hold certain federally-backed student loans have not been required to make any payments for the past year, but those with private loans have instead had to seek out their own relief.
While borrowers are made aware of the benefits offered by differing loan packages, either through entrance counseling, or by attempting to refinance after finishing their programs, the ongoing national relief being administered due to the pandemic is providing a new real-time example of the limitations and potential benefits of different types of student loans.
First implemented at the outset of the pandemic, and subsequently extended by President Donald Trump’s administration, the federal student loan administrative forbearance period offered a pause in interest accrual and monthly payments, and suspended collections activity on certain federally-backed loans. These benefits were then extended by President Joe Biden, who kicked the relief through Sept. 30, 2021.
When the Trump administration declared a national emergency on March 13, 2020, the federal government began administering short-term relief and private loan companies, somewhat in tandem, followed suit.
According to Scott Buchanan, executive director at Student Loan Servicing Alliance, many private loan companies in the beginning of the coronavirus outbreak offered a 90-day suspension period, which was very similar to the initial pause on federal loans implemented through an executive order.
However, private loan borrowers, in some instances, were required to request relief themselves by proving their economic need and were then offered some sort of repayment option tailored to their situation.
Kathryn Randolph, associate content writer and editor at Fastweb, said that private student loan lenders have offered more targeted aid than the blanket relief offered through the federal government.
“Private student loan companies are lowering interest rates or postponing payments, but it's up to the borrower to contact the private student loan lender to ask for that,” Randolph said.
What’s more, Randolph added, borrowers with private loans who are able to make payments and looking to reduce their principal balance may have a simpler process currently.
“[The federal government has] suspended direct debit payments at this point so you have to go in and make a manual payment each time you want to make one if you have a federal student loan,” Randolph said. “Whereas the private student loan, things are operating as normal. If you’re having an issue paying, that’s when you’re needing to reach out to your private loan lender.”
While there are benefits for private loan repayment, Betsy Mayotte — president of The Institute of Student Loan Advisors, a nonprofit that helps student loan borrowers with free advice and dispute resolution — has seen some borrowers who refinanced their federally-held loans into private ones are having buyer’s remorse.
“I've had a lot of emails from borrowers that said, ‘I refinanced my federal loans into the private loan program last year, last month, three years ago, and I'm really regretting it now a) because I'm not getting the [federal moratorium], or for a lot of them b) I lost my job. What should I do to get them to take that back?’” Mayotte said. “And of course you can’t, there’s no take-backs for that.”
Prior to the pandemic, borrowers may have been unaware that federal loans had these built-in benefits or that federal loans, as opposed to private loans, have a variety of safety nets built in.
“I am pretty conservative financially, so I like belts and suspenders, life jackets and the lifeboat. I want all of those things,” Mayotte said. “With that in mind as far as I'm concerned, [there are] just very, very few people where I would say that a private loan is more beneficial in any scenario.”
While borrowers with federal loans have until at least the end of September before payments return to normal, private loan borrowers are already seeing that change.
“Some [private lenders] are returning some sort of more normal payment options, primarily because the rate of uptake or people taking advantage of those forbearances has declined pretty meaningfully since sort of the peak back in June,” Buchanan said. “Frankly, on private education loans, the rate of delinquency and forbearance utilization is back to pre-pandemic levels now.”
Borrowers who have not seen a negative financial impact from the coronavirus could also make a significant dent in their federal repayments, but the prospect of loan forgiveness makes the calculation tricky, especially amid campaigns urging the federal government to act unilaterally and cancel all student loans.
The campaign to urge for cancellation of student loans has gained traction in recent months. Last November, a group of more than 235 nonprofit and community organizations urged Biden to take action on student loan debt forgiveness in response to the economic plight imposed by the ongoing pandemic.
The traction of potential debt cancellation, which has seen a flurry of legislative activity, has left borrowers questioning how to best manage their student debt.
According to Mayotte, the possibility of having up to $50,000 in federally-held student loans forgiven, as proposed by Sen Elizabeth Warren (D-Mass.) and Senate Majority Leader Chuck Schumer (D-N.Y.), has changed how borrowers are approaching their payments.
“There were a lot of consumers that don't understand that a resolution doesn't really have the same power as legislation. So they took that to mean that forgiveness was imminent, Mayotte said. “So not only did I see borrowers not being as willing to make payments and take advantage of the 0% interest rate, but I actually have seen a lot of borrowers that are contacting their loan servicer and asking for a refund of payments that they've made since March, because they don't want to, you know, lose out on any potential forgiveness.”
The timeline for offering student loan debt forgiveness could be contingent on elections, the pandemic itself, or executive authority — leaving many unanswered questions. But as borrowers begin to make economic choices, private loan companies could look to offer relief that might be salient to current federal loan holders, especially if the moratorium expires this year and borrowers are looking to save in the short-term.
“I could see private loan lenders capitalizing on that opportunity to say, ‘Hey, we have all of these benefits that you might not be able to take advantage of through those federal student loan lenders’,” Randolph said. “I could definitely see there being more competition within the space after September 30.”
Though, now that borrowers on a national scale are familiar with the benefits that can be administered by the federal government, without similar proactive measures private lenders could have a tough sell.
While the idea of loan forgiveness for federal borrowers has been gaining traction since the outset of the pandemic, it’s not at the forefront of the ongoing debate for private loan borrowers.
While Warren’s $50,000 forgiveness plan dated back to her presidential campaign, different versions of debt relief have taken hold as coronavirus relief bills began circulating last year. Following enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Democrats began considering additional aid that would offer up to $10,000 in loan forgiveness.
However, in another instance, House Democrats removed the blanket $10,000 in loan forgiveness and instead offered cancellation of up to $10,000 in private student loans for economically distressed borrowers.
Republicans have not backed these bills, instead focusing on continuing the loan moratorium — though some were looking to curtail that as early as last October by not including the provision in a slimmed down, Republican-crafted coronavirus aid package.
As the prospect for federal loan forgiveness remains afloat, Mayotte said she would prefer the federal government to first offer debt forgiveness to private loan holders before offering cancellation for federal loans.
“As someone who runs a nonprofit that works with struggling borrowers every day, [private loan holders] are the people that there often are no solutions for other than hoping that they don't get sued by the lender because they just can't afford to make their payments,” Mayotte said. “The people that do struggle with private loans, I think struggle exponentially more than the people that struggle with the federal loans.”
During the previous congressional session, Sen. Bernie Sanders (I-Vt.) and Rep. Ilhan Omar (D-Minn.) each called for an elimination of all student loan debt by requiring the federal government to purchase and then forgive the outstanding balance of interest and principal due on eligible private loans, in addition to wiping out federal student loan debt. Sanders' proposal did not garner any cosponsors, while Omar’s received the support of 15 House Democrats.
With enactment of Biden’s $1.9 trillion coronavirus relief plan, focus has turned to a provision that adjusts the tax code by making any student loan debt discharged through 2025 tax-free, which some have pointed to as a part of a continued effort to get Biden to cancel student loan debt.
In the meantime, there is concern about what the repayment process will look like once the current student loan moratorium comes to an end. NASFAA recently joined other higher education organizations in a memo detailing concerns about how to best resume the repayment process for federal student loan borrowers, urging ED to take a proactive approach in ensuring that borrowers can successfully prepare for repayment.
However, the prospect of private student loan forgiveness is far more complicated.
“Forgiving private student loan debt, politically, is a lot more complex because it's not a matter of sort of writing money off the books of the U.S. government and the U.S. taxpayer,” Mayotte said. “It would mean making payments to the private lenders.”
Publication Date: 3/22/2021
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