State of Impending Emergency: How Recovery From the Pandemic Could Complicate Student Loan Repayment

Related Topics in the Ref Desk: Direct Loans; DefermentForbearanceDischarge, cancellation, forgiveness

By Hugh T. Ferguson, NASFAA Staff Reporter 

The pandemic has put many seasonal rituals on hold — a surprisingly welcomed one being monthly student loan bills. While there were concerns over the logistics in administering the pause, getting the entire system back into repayment, with a somewhat fluid resumption date, is far more daunting.

“A lot of people are underestimating how difficult this is going to be,” said Preston Cooper, a visiting fellow for higher education policy at the Foundation for Research on Equal Opportunity. “We are really in uncharted territory here because we've never tried a student loan payment suspension of this magnitude before.”

There are many outstanding questions when it comes to resuming federal student loan repayment, stemming from the Department of Education (ED) navigating the reentry process and borrowers assessing their fiscal well-being and repayment options, to the potential for some form of debt forgiveness. All the while, many borrowers are attempting to grasp how the economy has transformed their professions and what sort of skills they’ll need for a post-pandemic workforce.

For instance, borrowers may be looking to switch their repayment plans to an income-driven repayment (IDR) plan due to a loss in their income. At the same time, there could be borrowers who relied on auto-payments, but now need to reassess their monthly budgeting to ensure that their accounts are not overdrawn, putting pressure on ED to determine the best way to restart the system.

All these factors will continue to be in flux, but some things remain constant — namely that the federal moratorium will at some point come to an end. Whenever and however that happens, the student loan system is likely to face a significant challenge in trying to work out this financial maelstrom, merely petrified and ready to thaw as the pandemic begins to wane.

There's some old-school data out there showing that a big indicator of student loan success with borrowers is simply being in the habit of repayment. And we've taken 42 million people out of the habit of repayment for over a year,” said Betsy Mayotte, president of The Institute of Student Loan Advisors, a nonprofit that helps student loan borrowers with free advice and dispute resolution.

The Moratorium and an Exploration of Executive Authority

The student loan moratorium is currently slated to expire at the end of September, per an executive order issued at the outset of President Joe Biden’s term.

The benefit was first implemented by former President Donald Trump in the early days of the pandemic in March 2020, and was then extended through executive and congressional authority, giving Biden the ability to unilaterally continue the relief.

While Congress did approve of an initial six-month suspension of student loan payments and interest accrual through the Coronavirus Aid, Relief, and Economic Security, (CARES) Act, lawmakers have not addressed the issue in any subsequently enacted legislation, and have instead permitted the executive branch to continue the extension.

When Trump unilaterally extended the authority in August as a slate of benefits were set to expire, with congressional negotiations over continued coronavirus relief stalled, he praised the policy as fiscally responsible.

“This relief has helped many students and parents retain financial stability,” the White House said in an extension of the moratorium. “And many other Americans have continued to routinely pay down their student loan balances, to more quickly eliminate their loans in the long run.  During this time, borrowers have been able to determine the best path forward for themselves.”

Trump went on to say that the policy was “appropriate” and should continue to be extended “until such time that the economy has stabilized, schools have reopened, and the crisis brought on by the COVID-19 pandemic has subsided.”

The rollout of that order remained unchallenged.

“The reason that the waivers weren’t challenged in the first place was because of where we were at as a country. It just made sense, there was no benefit to challenging that — you would have just looked like a jerk,” Mayotte said. “Congress was super quick to solidify that by passing the CARES Act, which sort of blessed it and made it allowable under statute, at least for the period of time of the CARES Act.”

Upon Biden’s swearing in, he utilized two components of executive authority, the first being an extension of Trump’s payment pause, and then on February 24 an extension of the declaration of a national emergency due to the COVID-19 pandemic. A national emergency declaration is automatically terminated one year after its declaration unless the president, within 90 days of the anniversary, submits a notice of extension.

The extension of the emergency grants the president significant authority in carrying out a number of powers, and according to a Congressional Research Service (CRS) report, that authority is wide-ranging and has become increasingly rooted in statutory law, which has not been revisited since the late 1970s.

The Brennan Center, a progressive public policy institute, found that when an emergency declaration is made, the president has 136 statutory powers at his disposal, with varying degrees of conditions by which they can be invoked.

For example, the Brennan Center’s analysis cited that the education secretary may waive Higher Education Act (HEA) provisions using authority granted under the Higher Education Relief Opportunities for Students HEROES Act “with no meaningful restrictions on [the] president’s power … as the Secretary deems necessary in connection with a war or other military operation or national emergency.”

Because of this power, a legal challenge to executive authority would be difficult, especially considering unsuccessful attempts to rescind Trump’s past emergency declaration to reprioritize federal funds and use them for a border wall. That national emergency only ended upon Biden rescinding it — congressional attempts to reign in Trump’s authority were unsuccessful.

Powers granted under the current national emergency could, in effect, continue without any additional notice from Biden through March 1, 2022.

But as the pandemic shows signs of waning in the United States, that authority could be tested, especially as Republicans in Congress begin to question the need for a number of federal relief benefits, including the student loan moratorium.

While progressives have continually cited HEA as a means of canceling student loan debt, which served as the basis of the presidential repayment pause, it is unclear whether the emergency declaration broadens the scope of executive authority to the point of administering debt forgiveness more widely.

But in a recent Senate Health, Education, Labor, and Pensions (HELP) committee hearing, on the nomination of James Kvaal to serve as ED under secretary, Ranking Member Richard Burr (R-N.C.) made it clear that any effort to offer loan forgiveness via executive authority would be met with swift and firm opposition.

“The Higher Education Act – or HEA – was enacted in 1965. Are we supposed to believe that for the last 56 years that the HEA has been in place, the secretary has been able to cancel vast amounts of debt for every single borrower in the United States this whole time and we just didn’t know about it until now?” Burr commented. “Mr. Kvaal, I must be honest with you and with everyone else on this committee: this does not pass the laugh test.”

However, any executive action, be it another extension of the moratorium or a surprisingly broad debt cancellation order from Biden that does not rely on congressionally-approved statute, could eventually face a legal challenge. Should Biden attempt to again extend the moratorium and it is successfully challenged, forcing borrowers back into repayment without sufficient notice, the whole system could be thrown into disarray.

“That's a scenario that I think could be a real nightmare,” Cooper said. “You can’t just flip a light switch and resume loan payments for [millions of] borrowers. … If we did find ourselves in that situation where there's a successful legal challenge to the payment moratorium and that all of a sudden means payments have to resume right away, that would be chaos.”

Likewise, a legal intervention in response to Biden offering some form of loan forgiveness could make things more difficult for borrowers.

“I think that's the other reason that [Biden] really wants Congress to do it,” Mayotte said.

Costs Associated With Federal Relief

The White House within its first 100 days received many questions about what actions it would take on student loan debt, and eventually tasked ED and the Department of Justice (DOJ) to draft a memo analyzing what, if any, authority the president has to administer forgiveness.

While ED garners input from Richard Cordray, who was recently appointed by Education Secretary Miguel Cardona to serve as chief operating officer (COO) at the Office of Federal Student Aid (FSA), the department is still waiting for Kvaal to be confirmed by the full Senate.

Kvaal in his Senate confirmation committee hearing said that if confirmed, he would focus on three policy buckets: examining student debts that exist now and that students can’t afford to repay; making college more affordable for current and future students; and putting particular focus on institutions that serve the highest proportion of low-income students and students of color.

As the administration works out its analysis into its authority, there are a number of costs associated not just with potential loan forgiveness, but also the moratorium itself.

New data has shown that $50,000 of student loan forgiveness would wipe out federal debt for 36 million borrowers. By that same metric, it would cost the government $938 billion to administer the relief.

Meanwhile, the moratorium also comes with a significant price tag, with ED calculating that the suspension has cost the government $38.6 billion from March through December of 2020.

“We're spending more on this payment moratorium on a monthly basis than we spend on Pell Grants,” Cooper said. “If you put interest rates at zero, that's disproportionately going to help people with more debt, who tend to be higher income people, who tend to be people with graduate degrees, who are going to be pretty close to the top of the economic ladder. It's a fairly regressive policy, so pretty much any other way that you spend that money is going to be a better use of it.”

In a recent Senate hearing, issues surrounding the mounting student loan debt took center stage. And while members highlighted a number of issues surrounding the growing costs, specifically the disproportionate burden the debt puts on Black borrowers and borrowers of color, there was little consensus as to how policymakers would respond.

While some believe signs of an economic recovery should bring the loan moratorium benefit to an end, there are also concerns over the costs associated with mismanaging the resumption of repayment.

“The federal government will need to work with loan servicers to ensure that folks are receiving clear information about loan repayment and the options in front of them if they currently do not have the economic resources to begin repaying,” said Dominique Baker, assistant professor of education policy at Southern Methodist University. “This all will require months of planning, so it is better for the federal government to change the date earlier rather than later. Otherwise, time and resources will be devoted to preparing borrowers for repayment only to be walked back later.”

Clarity on the Federal Loan Landscape

Separate from the memo on debt forgiveness, there is still a role for Congress to play when it comes to addressing student loan debt. As members await some sort of guidance from the administration, there are a number of steps they could take on the legislative front.

Rep. Mark Pocan (D-Wis.) urged Cardona to consider agency action that could help borrowers renegotiate the interest rates on their loans and pointed to a refinancing option that would allow borrowers to act whenever lower rates became available.

Mayotte said that for many borrowers, the prospect of refinancing would make repayment more manageable. In fact, she said borrowers have told her a permanent reduction in interest rates would be preferable to loan forgiveness.

“A lot of borrowers were saying to me, ‘I want to repay my loans. I feel like it's my obligation … but I don't feel like I'm on an even playing field with the way the interest rates are,’” Mayotte said.

Other think tanks have urged for more targeted relief, calling on policymakers to consider retroactively doubling Pell Grants for those who shouldn’t have had to borrow as much.

A group of conservative higher education experts stressed the importance of promoting clearer guidance for student loan repayment plans, a focus of potential loan forgiveness for borrowers with smaller debts, additional transparency for consumers, and a reassessment of costs based on what colleges are providing for their students.

Congressional Republicans, meanwhile, are beginning to target an internal ED report drafted under former Education Secretary Betsy DeVos, which could prompt legislation aiming to provide more federal oversight of the student loan system.

Outside of Congress, there is also a role for institutions of higher education in providing their students with resources to better understand the repayment landscape, such as through webinars for both current and former students, and ensuring campus personnel are equipped to advise students on loan repayment.

It’s also in the best interest of higher education institutions to provide those resources to help curb a surge in default rates when repayments resume.

With the potential resumption of repayments, Mayotte cautions that schools used to having less than 5% default rates could see surges of up to 10% or more.

“Even though we know the reason for that, it's certainly, optically, not a good look,” Mayotte said.

These policy debates will continue to play out during the annual appropriations process, which also has a September 30 deadline to prevent a lapse in government funding. Amid calls from conservatives to end the pause, Democrats are starting to urge ED to consider an extension.

How ED Could Provide Borrowers With Clarity

In the meantime, ED could work to keep borrowers informed about the logistics of a potential payment resumption. NASFAA recently joined a number of other higher education groups detailing recommendations to ensure borrowers are smoothly and successfully transitioned back into repayment, stressing the need for increased communications and detailing an outreach plan.

ED has pledged to “ramp up” communications with borrowers ahead of the eventual repayment. However, borrowers should be aware that another extension to the moratorium is not out of the question.

“We’re looking at it. Obviously we’re going to always take lead from what the data is telling us where we are as a country with regard to the recovery of the pandemic,” Cardona said at a recent event. “It’s not out of the question, but at this point it’s September 30.”

If the department were looking to better triage repayment, it would be beneficial to administer debt relief before borrowers go back into repayment so they could better focus on specific account holders, Mayotte said. For instance, if $10,000 were administered to borrowers across the board, that would eliminate all the federal student loans debt for about one-third of borrowers.

“Now you've eliminated those borrowers from the tidal wave of people entering repayment and created some more wiggle room for the people that will still have that, even after the broad forgiveness if it happens,” Mayotte said.“So for that reason, just from an operational standpoint, I think it does make sense to do it before the resumption of repaying.”

While ED sorts out the options available to resuming repayment, the agency is beginning to get bipartisan congressional pressure into detailing their plans. Sen. Elizabeth Warren (D-Mass.) recently spearheaded a letter to Cardona inquiring about the agency’s plan to smoothly transition borrowers back into repayment and a pair of Republican leaders have echoed calls for those details, while also urging ED to end the moratorium this fall, citing costs to taxpayers.

As the September 30 deadline approaches, these questions remain outstanding and the memo from ED and DOJ might not bring finality to the issue of potential forgiveness, leaving borrowers to contemplate the best way to rework their loans.

“That's probably not going to put an end to the debates over this because it's still just going to be one agency's opinion,” Cooper said. While he believes the memo will determine that the administration does not have the authority to offer blanket debt relief, that statement will do little to placate others.

For Mayotte, she hopes borrowers best prepare for the impending transition period.

“Borrowers should plan for the worst and hope for the best,” she said.


Publication Date: 6/8/2021

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