There’s apparently nothing like a pandemic to get the federal government moving on issues surrounding student loans, the second largest segment of consumer debt behind mortgage loans. At this time, only borrowers under federal loans are seeing relief. Private lenders have not reported any sweeping plans, leaving individuals with private student loans to reach out to their servicers for help.
Initially, the President announced that, starting on March 13, he would allow borrowers of federal student loans to temporarily suspend paying those debts for 60 days without accruing interest, and that this was subject to extension, if needed. Now, Congress has expanded that possible relief.
With the passage of the Congressional relief bill (now on its way to President Trump), federal student loans held by the Department of Education would automatically be put on pause for six months (through September 30, 2020) and interest would not accrue during that time. Borrowers could pay down principal during this period, should they wish to.
Credit reports would treat this period of suspension as if there were payments made. All collections against these same student loans through wage garnishments or tax refund reductions would be suspended for the same time period under the proposed bill.
Forbearance and deferment in times of personal economic stress have been available for federal student loans, but the savings on interest from the waiver under the policy is a new, temporary benefit of the stimulus plan. With reports of servicer call centers having closed, the automatic nature of the implementation also saves borrowers from trying to reach out to already over-taxed servicers who may not be readily available.
For those enrolled in the Public Service Loan Forgiveness program, which counts the number of “qualifying” monthly payments in a qualifying repayment plan to determine eligibility for loan forgiveness, these six months will also count toward that borrower’s payments.
However, borrowers with older Federal Family Education Loan Program (FFEL) loans or Perkins loans, which are not owned by the Department of Education, are not covered by the stimulus plan.
We’ve started to see the government taking action on the other end of the spectrum to support the credit markets. The Federal Reserve has also brought back Term Asset-Backed Secured Loan Facility (TALF) to bring liquidity to ABS markets, including those backed by student loans. The health of the ABS market requires a focus on investor relief that is commensurate with the relief provided to consumers, including potential bankruptcy reforms. We’ll analyze bankruptcy proposals in a separate post. In the meantime, participants’ planning efforts should begin with an analysis of their worst case scenarios in order to develop protective measures with the greatest chance of success.
Nicole Serratore, an attorney in the Insolvency, Creditors’ Rights & Financial Products Practice Group of Davis & Gilbert, contributed to this post.