Student Loans in the Era of COVID-19

About 1.2 million people will not benefit from the federal relief

COVID-19 has disrupted almost every aspect of everyday life, including at higher education institutions. Moving classes online, cancelling gatherings, and closing libraries, gyms, and housing have proven to be major disruptions for students, faculty and staff. 

But people who have left college and have student loans to repay are also facing grave financial worries. Student loan debt makes up the second largest household debt category in the United States, following mortgage loan debt. At the end of 2019, 45 million people collectively owed $1.51 trillion in student loans. Of this debt, 11.1 percent was 90+ days delinquent or in default. 

The COVID-19 crisis has imperiled former students’ abilities to cover their payments, as workplaces shutting down and layoffs rampant mean they are facing lost income and opportunities. The next month’s loan payments are coming due, threatening their ability to meet their basic needs. 

The $2 trillion COVID-19 relief package passed by Congress last week provides relief for some, though this relief is impermanent and drops many through the cracks. Advocates and leaders are still fighting for student debt cancellation.

What Do Borrowers Get?

If you are currently paying back student loans held by the U.S. Department of Education, you will be relieved from making payments until September 30. During this period, no interest will accrue. 

Additionally, all involuntary collections will also be put on pause for six months – this includes tax offsets, Social Security offsets, and collection activities like phone calls. 

These changes are automatic and will not require you to call your lender. Borrowers that chose to continue to pay down the principal on their loans can do so.

Are all Student Loans Eligible for the Suspension?

Only federally owned loans, held by the Department of Education, are eligible for the automatic suspension of student loan payments. In 2019, approximately 92 percent of the outstanding student loan balance was federally owned. This includes federal family education loans made in 2008-09 and 2009-10, when the titles were transferred to the U.S. Department of Education through the Ensuring Continued Access to Student Loans Act of 2008 (ECASLA). 

The stimulus package does not include Perkins loans and commercially-held federal education loans. Private student loans, which make up more than $123 billion of the outstanding student loan balance, are also not eligible for the automatic suspension. Holders of these loans may contact their lender and ask about their offers during the crisis.

Eligible for Suspended Payments –
Loans Held by the U.S. Department of Education 
Ineligible Loans
Federal Direct Stafford Loans Federal Family Education Loans except for those made in 2008-09 and 2009-10 
Federal Direct Grad PLUS Loans Private Loans 
Federal Direct Consolidation Loans Federal Direct PLUS Loans made under the Family Education Loans except for those made in 2008-09 and 2009-10
Federal Family Education Loans made in 2008-09 and 2009-10 (ECASLA)
Federal Family Education Loans if the borrower previously defaulted and the title was transferred to the U.S. Department of Education through a guarantee agency
Federal Direct Parent PLUS Loans 
Are Federally Owned Loans Forgiven at the End of the Six Months?

As it currently stands, federally owned loans are not forgiven. At the end of the six-month period, no interest will have accrued, but the balance will not have decreased. 

The Gaps

The relief is a step in the right direction, though it is limited in reach and scope. Due to its constraints, education advocates estimate about 1.2 million people will not benefit at all from the federal student loan relief, and an additional 9 million borrowers have at least one loan not covered by the COVID-19 emergency provisions. 

Those making regular payments will benefit the most. According to the Urban Institute, higher-earning households, who are likely to be making regular payments, will benefit the most from this pause and see increases in their cash-flow to meet their needs during the crisis. Low-income families have higher default rates, and thus may experience some benefit from the pause on involuntary collections. 

White households are also likely to benefit more than Black households. Black graduates are more likely to have larger student loan debt than white graduates four years after graduation. They are also more likely to default on their loans. This is a result of a variety of things, including workplace discrimination, lower earning power, and the predation of Black students by for-profit schools. 

Congress is already talking about a fourth COVID-19 relief package to come later in April. That package should include additional borrowers and actual cancelation of loans, or at least the reduction of principle. With loan forgiveness or reduction, by the end of the national emergency, households would see an immediate increase in cash flows to help with the revival of the overall economy.

To target those struggling the most with debt, including low-income households and households of Color, a nuanced and carefully designed program that includes a sliding income scale is necessary to guarantee that those with lower levels of income to receive the greatest support.

Student debt relief and forgiveness programs for a greater portion of student loan carriers is one step in the right direction for greater economic security. Going forward, we need to reconsider the models of high tuition at public colleges and universities, and limited financial aid that keeps so many households in economically tenuous positions.  

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