What’s in the CARES Act: Higher Education & Student Debt

On March 27, the President signed into law the CARES Act, a $2 trillion emergency economic relief package that seeks to stem the economic fallout from the coronavirus pandemic.  

The CARES Act includes urgently needed help for students, student loan borrowers, and colleges and universities, but it is only an important first step. While we applaud Congress for moving quickly to provide significant relief to Americans, action can’t stop here. It will be crucial for lawmakers to include additional funding to shore up students and institutions in future stimulus packages.  

Below, we outline the details on the higher education and student loan-related provisions in the CARES Act.  

Education Stabilization Fund 

The bill provides a total of $30.75 billion dollars to an “Education Stabilization Fund.”  

This pot of funds includes a maintenance of effort requirement that states must maintain their average funding for K-12 and higher education from the last three fiscal years for the next three fiscal years. However, the bill gives the Education Secretary broad authority to waive this requirement, which will likely need to happen as states face serious budget shortfalls in the years to come.  

The fund is divided into the following dedicated pots of money: 

Pot 1: The bill provides around 10 percent of total funds (approx. $3 billion) to governors to distribute.  

Governors can distribute these funds to agencies and institutions across K-12 and higher education that “have been most significantly impacted by coronavirus” to support their ongoing functionality and ability to continue to deliver education and services to students. 

Pot 2: The bill provides separate chunks of dedicated funding directly to K-12 agencies and directly to colleges and universities. 

Of this second pot of funding, 43.9 percent (approx. $13.5 billion) is directed to K-12 and 46.3 percent (approx. $14.25 billion) is directed to higher education institutions. The remaining two percent is dedicated to U.S. outlying areas, states hardest hit by coronavirus, and the Bureau of Indian Education.  

Of the approximately $14 billion dedicated to colleges and universities:  

• Ninety percent (approx. $13 billion) will go directly to institutions of higher education.
  

• • Three-quarters of these funds will be distributed to schools based on their enrollment of Pell students (not including those exclusively enrolled in online courses prior to coronavirus) and the remaining one quarter will be distributed to schools based on their non-Pell enrollment (again, not including those exclusively enrolled in online courses prior to coronavirus).
     
  • Institutions must use at least half of the funds they receive (for a total of approx. $6.975 billion across all institutions) to provide emergency financial aid grants to students for expenses related to the disruption of campus operations due to coronavirus. These expenses include costs such as food, housing, course materials, technology, health care, and child care.
    

• An additional 7.5 percent (approx. $1 billion) is reserved exclusively for Historically Black Colleges & Universities and other Minority-Serving Institutions.
  

• The remaining 2.5 percent (approx. $356 million) is reserved exclusively for certain institutions under Part B, Title VII of the Higher Education Act that the Department of Education determines have the most unmet need related to the effects of coronavirus.

Relief for (Most) Federal Student Loan Borrowers  

The bill also includes provisions to help student loan borrowers weather the effects of coronavirus on household budgets.  

The bill suspends all involuntary collections of defaulted student loans, including wage garnishments, Social Security garnishments, and tax refund offsets.

Further, the bill directs the Department of Education to automatically suspend payments on most federal student loans — Direct Loans and FFEL Loans held by the federal government — through September 30, 2020. 

After September 30, the payment suspension and interest waiver will end, and borrowers will receive communications from their servicer about transitioning back into repayment.

• No interest will accrue on covered loans during this time.  

• All months of payment suspension will count as “qualifying payments” for borrowers working toward forgiveness under Public Service Loan Forgiveness or income-driven repayment. 

• All months of suspended payments will also count as qualifying payments for borrowers rehabilitating defaulted loans.

• The Department of Education must report suspended payments to credit bureaus as if they were regular monthly payments made by the borrower.
   
• Importantly, these loan benefits don’t cover two types of federal student loans — older FFEL loans held by commercial lenders and campus-based Perkins loans. Non-covered loans account for nearly 12 percent of the federal loan portfolio (in dollar terms). 
  

• These benefits also don’t cover any private education loans. College-reported data show that nonfederal loans comprise about 17 percent of loan dollars held by public and nonprofit four-year college graduates in the Class of 2018.

• It is also unclear how unpaid interest accrued prior to the interest waiver will be treated once the waiver period ends. Determining this will be important because if that interest is capitalized it can create significant increased long-term costs for borrowers.

Flexibility for Colleges & Universities & Emergency Aid to College Students 

The bill also gives emergency flexibilities to college students as well as colleges and universities. 

For example, institutions will no longer need to match funds for campus-based aid programs. Institutions are also now allowed to use federal Supplemental Educational Opportunity Grant (SEOG) funds for emergency scholarships to students. Schools can also issue work-study payments to students who are unable to work due to workplace closures. 

The bill also takes steps to ensure students who had to leave school due to the effects of coronavirus will not be penalized in the future by excluding the term from counting toward financial aid time limits and waiving Satisfactory Academic Progress requirements. It also waives certain program requirements for teachers pursuing teacher loan forgiveness.  

Employer Tax Credit for Student Loan Borrowers 

The bill includes a temporary provision to expand the existing tax exclusion for employer–provided educational assistance to include employer-paid student loan benefits (the benefit ends at the end of 2020, meaning it will only last for one tax filing season).   

The tax break would enable an employer to provide up to $5,250 toward an employees’ education costs (existing law) or toward an employees’ existing student loan debt (new temporary benefit). This benefit would be excluded from the beneficiary’s wages and therefore not taxed.