COVID-19 Student Loan Repayment Relief is Critical, But Two Consequences Need to be Addressed to Protect Borrowers

To support borrowers during the COVID-19 pandemic, the federal government has provided historic student loan repayment relief through a pandemic forbearance that was authorized by the CARES Act and already extended once by the Administration. This temporary relief — currently scheduled to expire at the end of this year — suspends monthly payment requirements for all borrowers with Direct Loans, and FFELP loans, and Perkins loans.^[1] During this pause-payment period, interest does not accrue, and all months of nonpayment count as qualifying payments for student loan forgiveness under the income-driven repayment and the Public Service Loan Forgiveness programs. Collections on defaulted loans have also been suspended, and when payment requirements resume, all borrowers who were delinquent when the payment pause took effect will re-enter repayment in good standing on their loans.

This emergency forbearance relief has provided vital economic support to upwards of 33 million borrowers with eligible loans, who can better cover their basic needs during the current crisis without having to worry about their balances ballooning from unpaid interest, or their loans falling into delinquency or default.^[2] It remains critical that the current benefits be expanded to cover all federal loan borrowers and extended to cover the duration of the crisis, and that relief also be provided for private education loan borrowers. At the same time, looking forward, there are two consequences of these benefits for policymakers to consider and make plans to address.

The end of the payment pause could lead to a wave of delinquencies and defaults

While the emergency loan payment relief likely prevented an immediate spike in delinquencies and new defaults during the pandemic, it is possible that, for many students, default has been delayed rather than prevented. The Government Accountability Office (GAO) has found that long-term forbearances can delay default, rather than prevent them.^[3] The Department of Education has also repeatedly linked borrowers exiting local disaster-related forbearance status with increases in national rates of delinquencies and new defaults.^[4] This experience underscores that assisting borrowers with reentering repayment will be as important as providing the benefits to begin with.

When the current relief expires, tens of millions of borrowers will be re-entering repayment after nine months in pause-payment status — longer if benefits are extended. Proactively helping this historic number of borrowers get back into successful repayment to mitigate risks of delinquency and default will require outreach and coordination efforts at an unprecedented scale. We urge the Department of Education to work with servicers now to develop concrete plans, in coordination with consumer and student groups and schools.

The existing period of pause payment will lower Cohort Default Rates for years to come

The cohort default rate (CDR) is the federal government’s most longstanding and critical metric for tracking the risk of default that colleges pose to their borrowers. It measures rates of default among a specific group of borrowers shortly after leaving school, and as such provides a comparable, consistent measure for use in accountability. Schools with unacceptably high CDRs — over 30 percent for three consecutive years, or over 40 percent for any single year, are deemed too risky for continued federal investment, and thus lose the ability to offer federal financial aid (federal student loans and/or Pell Grants).

The CDR tracks borrowers for a discrete period of time — a period that will overlap with months when most borrowers were not required to make payments, and during which delinquent loans were reset to good standing. As a result, the current payment pause is likely to result in CDRs that are much lower than would be otherwise expected — decreases that will reflect the impact of a major federal policy intervention to protect borrowers more than actions undertaken by colleges to set their students up for repayment success.

To illustrate: borrowers who entered repayment between October 2017 and September 2018 will make up the cohort for the FY18 CDR, and their default outcomes are tracked through September 2020. Yet the pandemic forbearance, in place since March 2020, should have prevented any federal student loan from defaulting for the last six months of the three-year tracking window. Borrowers included in later cohorts will have spent even longer in payment-pause status. For example, even if the payment pause is not extended, the FY19 cohort will have spent nine months in pause payment by the time their tracking period closes in September 2022.

All in all, if the payment pause expires at the end of December 2020, as is scheduled, four years of CDRs will be impacted — the FY18 rates released in September 2021 through the FY21 rates released in September 2024 (see table below). Furthermore, because the CDR accountability regime relies on three consecutive years of CDRs, the payment pause will impact accountability determinations through 2026. If the payment pause is extended beyond 2020, as we recommend given the ongoing effects of the pandemic, its unintended impacts on college accountability will echo for even longer.

CDR Cohorts Impacted by Current Student Loan Payment Pause

The CDR’s inherent value in measuring a discrete, unequivocally bad repayment outcome remains unchanged, even as federal policy intervention for the sake of borrowers has reduced its utility at this time. As policymakers work through the best way to support both borrowers and colleges during the COVID-19 crisis, they must not lose sight of the continuing need to ensure colleges are held accountable for consistently unacceptable student outcomes. The need for robust accountability is particularly urgent given the Trump Administration’s repeal of the federal gainful employment rule and in light of the sudden and near universal pivot to online education where too many quality questions remain unanswered.

[1] These benefits do not cover two types of federal student loans — older FFELP loans held by commercial lenders and campus-based Perkins loans. Non-covered loans account for nearly 11 percent of the federal loan portfolio (in dollar terms). (TICAS Calculations on data from the U.S. Department of Education, Federal Student Aid, “Direct Loan and Federal Family Education Loan Portfolio by Loan Status,” September 22, 2020, https://bit.ly/1O6zgrW and “Federal Student Aid Portfolio Summary,” https://bit.ly/2hvfiOd. September 22, 2020.) They also do not cover private education loans; college-reported data show that nonfederal loans comprise 16 percent of loan dollars held by four-year public and nonprofit college graduates in the Class of 2019 (see TICAS. 2020. Student Debt and the Class of 2019. https://bit.ly/2JN95N8).

[2] Calculations by TICAS using data from the U.S. Department of Education, Federal Student Aid Data Center, “Federally Managed Portfolio by Loan Status,” https://bityl.co/4DrD, October 29, 2020.

[3] U.S. Government Accountability Office. April 2018. “Federal Student Loans: Actions Needed to Improve Oversight of Schools’ Default Rates.” https://www.gao.gov/products/GAO-18-163.

[4] See, for example, U.S. Department of Education IFAP notices for FSA Data Center Updates on August 7, 2019 and January 3, 2020.