Behind the Scenes of Student Loan Payments During Covid-19

Recent media reports have warned about increasing federal student loan defaults and called upon Washington to extend the current suspension of payments. In a piece for CNBC, Annie Nova quotes Mark Kantrowitz, a higher education expert, as saying “The payment pause and interest waiver should be extended because the disruption is ongoing and the recovery will be sluggish.”

While experts claim that more delinquencies and defaults are coming the irony is that Congress has already taken action to prevent this without throwing in the towel on the entire $1.4 Trillion in outstanding loans. Decades of bipartisan efforts have produced programs for Federal student loan borrowers that are ideally suited to meet the current circumstances. What is needed now is additional education to explain how to take advantage of these programs.  

A bit of history

In 1994, Congress and then-President Bill Clinton introduced the first income-driven repayment plan called Income-Contingent Repayment (ICR).  The ICR plan allowed borrowers to repay their federal student loans with a monthly payment amount which took into consideration both the borrower’s income level and their family size. If the loans were not paid in full within a specified period (20 or 25 years), the remaining balance was forgiven. Thus, a zero dollar payment could actually enable the borrower to remain in “good standing.”

Congress continued to improve and expand the program under both President George W. Bush and President Barack Obama .

In 2007 the process was updated and made more borrower-friendly by capping the payment amount to 15 percent of discretionary income and provided for loan forgiveness after 25 years.

In 2010 the program was further improved and was called Pay As You Earn (PAYE). This program limited monthly payment amounts to 10 percent of discretionary income and provided for forgiveness after only 20 years.  In 2015 the plan went through further improvements  and called Revised Pay As You Earn (REPAYE).

This all reflects  a long term, bipartisan effort to provide student loan borrowers with the tools and resources to address the very times we are experiencing today. Income-driven repayment is already available to provide relief to the millions who have been so deeply impacted by the Covid-19 pandemic.

These unique plans can allow for reduced payment amounts, many in the amount of $0.00 per month, for up to a year.  Congress even had the foresight to ensure that if you have a $0.00 repayment plan, that those payments would continue to count toward Public Service Loan Forgiveness. Congress and past Presidents have provided student loan borrowers with the options necessary to avoid the painful consequences of delinquency and default.

Back to today

The CARES Act signed by President Trump on March 25, 2020 did a few important things related to defaulted loans:

• It set the interest rate on all outstanding loans at 0% for March 13-September 30, 2020.
• It automatically put all loans (defaulted and not defaulted) into forbearance for March 13-September 30, 2020.
• It eliminated all administrative wage garnishments on defaulted loans for March 13-September 30 (if garnishment did occur, FSA says the money will be returned).
• It provided that, if a borrower was enrolled in a rehabilitation plan prior to March 13, 2020, the payments that would have been due between March 13-September 30 but are automatically in forbearance, will count towards the nine payments required to rehabilitate. For instance: 
• If a borrower enrolled in February and made payments on February 10 and March 10, the $0 payments for April - September will count towards rehabilitation.
• If a borrower enrolls in June, the paperwork would be gathered but the borrower would make $0 payments for June-September. So she would owe only five payments after that vs. a total of nine payments to rehabilitate the loan and get out of default.

• It provided that, if a borrower was enrolled in an Income-Driven Repayment Plan (IDR), $0 payments during the forbearance period would apply towards the requirement for forgiveness.

The CARES Act also prohibited Private Collection Agencies from sending collection letters or making outbound collection calls to defaulted federal student loan borrowers, which means PCAs may not reach out to borrowers to inform them of these programs and opportunities.  The only way a borrower could learn about them is if they happen to read the FAQs on the Federal Student Aid website.

insideARM is told that FSA has made one exception. PCAs may send ONE letter and make ONE phone call to the subset of borrowers who had expressed interest in one of these programs and had made at least one payment since January but had not yet completed their documentation. Without completed documentation, the $0 payments during forbearance will not count. One estimate suggests that there are approximately 150,000 borrowers in this category.

One letter and one phone call rarely prove to be enough to make contact with a borrower. Complicating the matter is that if the collector reaches a voicemail recording rather than a person but the recording doesn’t specifically state the borrower’s name, because of privacy requirements, many PCAs will not leave a message.

This seems to deprive thousands of borrowers of taking advantage of an incredible opportunity to either rehabilitate their loan or get credit towards forgiveness for $0. The Government got this one right ahead of time. Now is the time to put those plans to good use. Let collectors contact borrowers. I’m not talking about garnishment. I’m not talking about demanding payment. I’m talking about education and assistance with paperwork that could offer great relief to struggling consumers.

This issue only becomes more exaggerated if the provisions of the CARES Act are extended.