Blog Post | March 18, 2020

Facing COVID-19, Student Loan Borrowers Need A Break

Author: James Kvaal

Cross-posted from Forbes.

Rocked by the coronavirus, the American economy is teetering. Temporary relief for the 20 million Americans making student loan payments would immediately relieve strain on household budgets and deliver a quick jolt to the economy.

Student loans are far more important to the economy than in any previous downturn. When the economy last entered a recession in late 2007, federal student debt stood at $516 billion. Since then, it has tripled to over $1.5 trillion.

Because the Department of Education could halt collection virtually overnight, it would help families immediately, far faster than even cash payments. We estimate that it would free up about $50 billion over the next six months in help to families.

Last week, the White House waived interest on federal student loans, a welcome step that makes existing loans interest-free for an unspecified period. But, while waiving interest will reduce balances and therefore future payments, it won’t reduce monthly payments now. Instead, unless they take action, borrowers will pay the same amount each month, only the payments will be used to pay down the principal of the loan rather than both principal and interest.

True, the White House announcement means that borrowers can now defer their loan payments without interest piling up. Struggling borrowers also have the longstanding option have of enrolling in an income-driven repayment plan, or — if they are already enrolled — recalculating their payments based on lost income.

But borrowers often struggle to navigate the myriad of repayment options, even in better times. If many seek forbearance, they could quickly overwhelm servicers — who are already struggling to keep up their regular workloads — and lead to errors. Finally, borrowers who made career choices to earn loan forgiveness through a set period of repayment — either through Public Service Loan Forgiveness or income-driven repayment — would lose months of work toward forgiveness.

The White House action also does little to help some of the most vulnerable borrowers: those suffering wage garnishments and tax offsets. In the past, stimulus payments were confiscated to pay for defaulted loans, defeating their purpose of helping families and the economy at large. Ceasing these collections would provide critical financial relief for vulnerable, low-income borrowers who need to prioritize necessities now, more than ever.

For a real, immediate benefit to all borrowers — and a push to the economy — policymakers need to act now to provide across-the-board relief on monthly loan payments. To provide immediate relief to all student loan borrowers, my colleagues Jessica Thompson and Michele Streeter of The Institute for College Access and Success and I recommend:

  • Implementing an emergency “pause payment” for all federal student loan borrowers for at least six months, with no payments due and no interest accrual during this period;
  • Providing an opt-out so borrowers can continue to make payments if they choose;
  • Ensuring that the clock runs toward student loan forgiveness under the income-driven repayment and the Public Service Loan Forgiveness programs;
  • Immediately stopping all involuntary loan payments, including wage garnishments, Social Security garnishments, and tax refund offsets; and
  • Ensuring that borrowers receive consistent and clear communications from both the Department of Education and its contractors.

A payment pause will allow borrowers to cover the necessities, without having to worry about their interest ballooning or their loans falling into default. It would offer automatic, certain, and immediate relief to all borrowers, including those juggling sudden shifts in routine and having little time to actively manage their student loan payments.

Congress and the White House are urgently working to shore up the economy and help families stay afloat during this unprecedented situation. Congress and the Education Department can immediately take steps to pause payments on student loans. Student loan borrowers will get the relief they need, and funds will be freed up to help stimulate the broader economy.