Federal Student Loan Debt Relief Significant, but Insufficient

By Anastasia Martinez, Policy Analyst

A college degree is an important first step for many to pursue their dreams. Unfortunately, this dream is increasingly out of reach for many students from low-income backgrounds, including students of color and non-traditional students. State funding cuts have led to vast tuition and fees increases at our state universities and colleges, placing the financial burden of public higher education even more squarely on the shoulders of students and families.

Many students must borrow money to cover the costs of higher education. Higher education costs have often led to significant student loan debt and have become another obstacle in students’ ability to pursue their dreams (see table). Student loan debt has been a burden for many borrowers for years, leading to loan defaults and garnishment of wages. In 2016, only 30 percent of the lowest-income households with student loan debt were able to make payments on their student loans.[1]

2017–18 Federal Student Loan Burdens By the Numbers (Public 4 yr. Campuses)[2]

The novel coronavirus COVID-19 pandemic has caused unprecedented policy challenges for all levels and sectors of government, and this extends to higher education. Campuses have closed in the middle of semesters, forcing students to find housing elsewhere and classes to transition to online platforms. Some campuses have been able to return some tuition to students, however, some institutions cannot afford to do that.[3]

Fortunately, government exists for moments like this. While there are no student loan borrowers who have been unaffected in their everyday lives by the pandemic, how they have been affected can vary greatly depending upon the type of student loan the borrower has. Policymakers will need to keep in mind that a complex system of public, private, state, and federal loans put borrowers in different situations. This complex system will require multi-faceted policy solutions to achieve equitable outcomes around debt relief, such as:

• Partial or full student debt cancelation
• Debt-free access to higher education, ensuring students are not overly-burdened by student loan debt in the first place

Student Loan Relief in the Coronavirus Aid, Relief, and Economic Security Act

The federal Coronavirus Aid, Relief, and Economic Security Act (“CARES Act,” or “C3”), provides substantial federal fiscal relief for the states, benefits to certain businesses, as well as direct payments to individuals suffering hardship due to the pandemic and the subsequent economic disruption.[4] It also provides some important student loan relief.

While the CARES Act provides a variety of assistance to the higher education sector as a whole, this brief focuses on relief provided for federal student loan borrowers. The CARES Act has two specific provisions related to modifying federal student loans:

Temporary Relief for Student Loan Borrowers[5]

What is included:

• All loan repayments owned by the U.S. Department of Education (DOE) are suspended through September 30, 2020. This includes Direct Loans and Federal Family Education Loans (those that are owned by the DOE).
• No interest will build up on these student loans during this time. This suspension and freeze of interest will happen automatically, meaning a borrower does not have to contact their loan provider or the DOE.
• All involuntary collections are suspended, such as garnishment (the automatic retrieval) of wages, Social Security payments, or tax refunds for loans that are in default.
• Any payments paused between now and September 30, 2020 will still count towards the 120- month federal student loan payments needed for the Public Service Loan Forgiveness program.

However, suspension and interest freeze does not apply to all loans such as:

• Perkins Loans and commercially-owned Federal Family Education Loans. Although these loans are guaranteed by the federal government, they are owned by private lenders and colleges.Suspension and freezes only apply to federal student loans owned by the federal government.
• Private loans.
• Loans issued by state loan agencies and quasi-public agencies, such as the Massachusetts Educational Financing Authority (MEFA).

What is missing:

The CARES Act postpones payments on student loans, but this is unlikely to provide long-term relief. Once this temporary relief ends at the end of September, borrowers will still owe the same total amount on their loans, regardless of financial hardships experienced before, during, or after this pandemic. Moreover, since it is still unknown how long this economic crisis will last, the duration of this relief may likely be insufficient for many federal student loan borrowers.

Tax Breaks for Student Loan Payback Programs [6]

The CARES Act contains a temporary plan to provide relief to workers whose employer offers student loan payback programs — a benefit in which an employer provides loan repayment assistance. Employees may exclude up to $5,250 of employer-paid student loan payments from their taxable income.[7] Payments made to employees or lenders before the end of 2020 will be tax-free.

While this tax break is helpful for some borrowers, it will not have a significant impact on the financial burden of student debt for many. First, a worker must be employed at a company that offers this loan repayment assistance. A 2018 survey found only 4% of U.S. employers offer this type of program.[8] Second, most jobs providing this type of program tend to be higher paying, meaning that lower-income workers would mostly be left out and unemployed borrowers would not benefit at all. With unemployment rising at an unprecedented rate, fewer and fewer people will benefit from this provision.

What else can the federal government do to support borrowers:

There are a variety of federal proposals to alleviate student loan debt. Many of these provide targeted solutions that focus on student loan debt relief including:

• Cancelation of up to $30,000 in federal student loans for borrowers during the national emergency.
• Extended suspension of all involuntary debt collection such as garnishment of wages, tax refunds, and Social Security benefits beyond the national emergency.[9]
• Cancel a portion of student loan debt, then the U.S. DOE would take over remaining loan payments during the national emergency (including Direct Loans and Federal Family Education Loans). All payments made by the DOE would be tax-free.[10]

What Massachusetts can do to support borrowers:

Massachusetts has taken some initial steps to help borrowers. Policymakers should continue to consider bold state legislation to alleviate the financial circumstances faced by student loan borrowers within the Commonwealth.

The Massachusetts Department of Higher Education took its first step on April 21, 2020 by deferring payments for its No-Interest Loan Program. Loans within this program will automatically be placed in deferment (and will not build up interest) from April 2020 through July 2020. Additionally, past-due accounts will not be placed into collections until August 2020.[11]

Furthermore, the Massachusetts Division of Banks has joined a multi-state initiative that provides relief for borrowers with commercially-owned Federal Family Education Loans and certain privately held student loans. Relief options include:

• 90-day forbearance (which suspends payments but allows interest to still build up)
• No late payment fees
• No negative credit reporting

However, only some private loan servicers have joined the initiative. Agencies such as the Massachusetts Educational Financing Authority (MEFA) (which provides loans through American Education Services) are not part of this initiative.[12] Though MEFA does encourage borrowers to contact them for personalized assistance such as temporary forbearance and modified payment plans.

Furthermore, legislation is currently pending in Massachusetts to suspend interest build up and collection of student loan payments provided for post-secondary education or vocational training during the COVID-19 emergency. The legislation states, “Every public agency or authority of the Commonwealth, including, but not limited to, the Massachusetts Educational Financing Authority shall suspend payment and collection of student loan payments and interest on such payments will not build up during this time”. [13]

While these steps will benefit some borrowers, much is left to do to support all borrowers. Massachusetts has not enacted any policies that would cancel any portion of state higher education loans. Loan cancellation would provide the most relief for borrowers, particularly the lowest-income borrowers and those who have lost their income due to the pandemic. Without some kind of significant relief, the Commonwealth risks creating a large cohort of college graduates unable to start their post-college careers without the obstacle of student debt over-shadowing their futures.

Anastasia Martinez is a Policy Analyst and State Policy Fellow focused on education research and analysis at MassBudget.

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ENDNOTES:

[1] Matthew Chingos. “What Does the COVID-19 Fiscal Relief Package Mean for Student Loan Borrowers?”, Urban Institute 2020. https://www.urban.org/urban-wire/what-does-covid-19-fiscal-relief-package-mean-student-loan-borrowers

[2] College Insight. Generated table of “Student Debt of Graduating Seniors”, variables: National Average Debt, National Percentage of Graduates Borrowing, Massachusetts Average Debt, and Massachusetts Percentage of Graduates Borrowing. https://college-insight.org/topics/student-debt-of-graduating-seniors/1

[3] Marjorie Valbrun. “A Lifeline For Sinking Budget”, Inside Higher Ed. https://www.insidehighered.com/news/2020/04/24/congress-allocates-more-1-billion-stimulus-funds-struggling-minority-serving

[4 ]For a summary of the CARES Act see: https://www.congress.gov/bill/116th-congress/house-bill/748?q=%7B%22search%22%3A%5B%22Coronavirus%22%5D%7D&s=3&r=3 and also https://crsreports.congress.gov/product/pdf/IN/IN11315

[5] Final CARES ACT. Section 3513- “Temporary relief for federal student loan borrowers.” https://www.congress.gov/bill/116th-congress/house-bill/748/text

[6] Final CARES ACT. Section 3513- “Exclusions for certain employer payments of student loans.” https://www.congress.gov/bill/116th-congress/house-bill/748/text

[7] United States Congress. “Educational Assistance Programs” (a) Exclusion from gross income (2) $5,250 maximum exclusion. https://uscode.house.gov/view.xhtml?req=(title:26%20section:127%20edition:prelim)

[8] The Society For Human Resource Management. “2018 Employee Benefits.” https://www.shrm.org/hr-today/trends-and-forecasting/research-and-surveys/Documents/2018%20Employee%20Benefits%20Report.pdf

[9] United State House of Representatives. “The Student Debt Emergency Relief Act.” https://pressley.house.gov/sites/pressley.house.gov/files/200322%20Student%20Debt%20Emergency%20Relief%20One%20Pager.pdf

[10] United States Senate. “Senate Democrats’ Proposal To Aid Federal Student Loan Borrowers During Coronavirus Crisis.” https://www.democrats.senate.gov/imo/media/doc/03192020%20Student%20Loan%20Payment%20Relief%20Summary.pdf

[11] Office of Governor Charlie Baker, “Baker-Polito Administration Announces Extension of School and Non-Emergency Child Care Programs Closures, Continued Steps to Support COVID-19 Response.” https://www.mass.gov/news/baker-polito-administration-announces-extension-of-school-and-non-emergency-child-care-0

[12] “Private Student Loan Relief Announced for Borrowers in Massachusetts affected by COVID-19.” https://www.mass.gov/doc/consumer-advisory-private-student-loan-relief-announced-for-massachusetts-borrowers/download

[13] Massachusetts Legislature. “House №4961- An Act suspending student loan debt due to the COVID-19 emergency.” March 20, 2020. https://malegislature.gov/Bills/191/HD4961