March 18, 2020
With more and more of the country instituting emergency steps to prevent the spread of COVID-19, and businesses forced to suddenly lay off workers, the higher education community is scrambling for ideas to help students and borrowers immediately. On Friday, the president joined that conversation, promising to waive interest rates for the duration of the crisis -- a move I and others critiqued as unlikely to do anything to lower borrowers’ monthly payments right when they need it.
To actually help families’ budgets right now, the Trump Administration could take advantage of its authority to automatically place borrowers into forbearance during an emergency. Coupled with setting interest rates on student loans to zero, as they’ve already committed to, that would give borrowers a way to delay their payments, without adding to their long-term costs on their loans. This sounds like a smart, simple way to address some of the shorter- and longer-term fallout for borrowers. But there’s good reason to proceed cautiously to make sure that borrowers, whether they can or cannot afford to keep paying their loans, aren’t inadvertently harmed by emergency forbearances.
Just last year, the Department of Education noted an unexpected and disturbing side effect of these emergency forbearances. After several natural disasters in 2017, borrowers accessed forbearances to provide relief and prevent them from defaulting. But by 2019, those borrowers were showing up in federal data as delinquent or in default on their loans. As of March 2019, delinquency rates had increased by two percentage points, an increase the Department said was “heavily influenced by the large influx of borrowers placed into mandatory administrative forbearance as a result of natural disasters such as Hurricanes Harvey, Irma, and Maria and the California wildfires.” Similarly, around 338,000 borrowers leaving their administrative forbearances were in default on their loans, contributing to an increase in the number of student loan defaulters. By the agency’s next quarterly update, even more had defaulted, with 352,000 borrowers in default after getting a disaster-related forbearance.
Lots of questions remain to be answered about these data, including some highlighted last year by Colleen Campbell (then of the Center for American Progress). Did borrowers who experienced natural disasters and subsequent forbearances simply move out of the area, or change their contact info, making it harder for servicers to contact them again? Were borrowers out of the habit of making payments, and of accounting for those payments in their budgets? Were the borrowers who took advantage of the forbearances already in bad shape on repayment, so less likely to be on-track even if they hadn’t experienced the interruption?
But perhaps the biggest question is, can the federal government do this again--this time to an entire nation of borrowers--without leaving some borrowers worse off, with a greater likelihood of defaulting on their loans? And since we don’t know how long this crisis will last, how can we both respond to the short-term and prepare for the long-term?
Given the risk we’ve seen in the past, a more limited approach could make sense here, following one simple rule: Do no harm.
The Education Department should immediately, clearly, and aggressively communicate borrowers’ options to them, making clear that any borrower facing emergency circumstances is eligible for an interest-free forbearance, or that they may enroll in and/or update their income-driven repayment documentation to reflect a change in their incomes. While forbearances are the easiest approach for a borrower seeking a temporary delay in payments, for borrowers who will probably struggle from the recession that’s likely to come after the current rounds of layoffs, an income-driven repayment option might be a better choice -- particularly paired with the administration’s zero-interest-rate promise that protects borrowers from accruing larger balances in the short-term.
Moreover, an opt-in process for most borrowers will help to avoid the mass confusion that can arise among borrowers struggling to navigate the jargon and maze of options in the federal loan program. And it will ensure that, for borrowers who can, they continue to repay--and that borrowers who are still working toward cancellation of their loans through the Public Service Loan Forgiveness program or who prefer to make payments on forgiveness-bound income-driven repayment plans can continue to make qualifying payments. If those borrowers were automatically foisted into forbearances, the eventual outcry when they realize some of their months of employment didn’t count toward PSLF would be loud.
For those suffering the most right now, the Department can do more. It should ensure that any borrower who misses the communication and still falls behind on his loans is protected, by automatically applying the interest-free forbearance for the borrower. Moreover, for borrowers whose loans are already in collections--facing wage garnishment or offset of their tax refunds, for instance--those actions should be ended to ensure families have the money they need in their pockets now.
Those actions must be coupled with careful action to avoid a spike in student loan defaults as the crisis concludes. There are no perfect answers for doing so -- although hopefully this is an issue that the Office of Federal Student Aid has been investigating since it first reported the issue last year to develop some possible solutions. At a minimum though, the Department can be clear about the timeframe for this forbearance (with the caveat that the delay could be extended later depending on public health circumstances), what the borrower’s payment will return to following the crisis, and options for further reducing payments if the borrower is not back to full employment by then. It can communicate, early and often, that borrowers need to notify their servicers if their contact information changes, and what it will look like to re-enter repayment. Clear, consistent, concrete communications from the Department and its loan servicers are essential to keeping borrowers from falling off track.
The public-health and economic emergency our country now faces isn’t (yet) the usual kind of recession -- going back to school isn’t necessarily an option for many workers, nor will it necessarily help them to find a job. The most important thing now is to ensure Americans have access to funds they will need to get through the immediate crisis -- which should include temporarily freeing student loan borrowers’ finances of their monthly payments, where needed, so they are best able to weather the storm. By following the “do no harm” principle we note here, there’s more the federal government can do to help those who need it.
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