Recently, I have seen several distressing headlines about COVID-19 and student loans—all of them written to capture attention and alarm readers. Headlines like A Massive Wave of Student Loan Default is Coming and Delinquencies, defaults will rise for student loan borrowers if pause on payments isn’t extended continue to feed the myth that student loan debt is breaking the backs of American families. It’s time to peel back the layers of overly dramatic hype and get to the bottom of the impact this pandemic will truly have on loan repayment rates.
Who’s Stirring the Pot?
If you’re wondering where all the misinformation about student debt is coming from, look no further than politicians and the media. Many of these individuals are guilty of turning the college funding crisis into campaign promises and headlines meant to stoke fear in an already uncertain time. After all, their job is to create tension and jar the public into paying attention to them. Your grandma might have called this ‘stirring the pot.’ I call it spreading false information.
You might think I’m being overly dramatic. But set that aside for a moment and take a look at one of the many books that have been written on this topic, Game of Loans by Beth Akers and Matthew M. Chingos.
We have been highlighting and focusing on the wrong issues regarding student debt, and that is taking the spotlight off of the real issues facing students.
The False Narrative
Let’s talk about the story that’s being told. Students, parents, and institutions are being led to believe that COVID-19 will increase defaults on student loans and that students will be trapped in payments they cannot afford.
We all know the pandemic has significantly impacted employment rates across the country, punctuated with an astounding rate of 13.3% in May. Families have weathered stay-at-home orders that have resulted in reduced income and savings. It’s safe to say this has been a difficult time, both personally and financially, for everyone.
The federal government passed the CARES Act to help offset the broader financial impacts of COVID-19. This allows for adjustments regarding who is eligible for unemployment benefits, increases in unemployment payments, and individual stimulus payments. In addition, steps were taken to specifically address federally-held student loans. Interest rates were set to 0% and payments were suspended until September 30, 2020. While not every borrower got relief, these steps have allowed 45 million people with government-held student loans time to breathe, and I think we can all agree that is a good thing.
Politicians have been using the future expiration of CARES Act protections to push for new legislation proposing deferred loan payments for an additional year to revamp loan repayment options and to hock their campaign promises of student debt forgiveness. But they’re trying to sell us something we don’t need. We don’t need new legislation to protect low-income students or to grant loan forgiveness. Why? Because both of those things are already part of our current system.
Every federally-held student loan holder has the ability to enter into in an income-driven repayment plan. The Congressional Budget Office (CBO) estimates that in 2017, 45% of direct loans were in an income-driven repayment plan—up from 12% in 2010—and there are several things that are consistent across every income-driven program:
- Loan payments are based on student income. Students certify their income annually, and their payment amount is a predefined percentage of their income. Students whose earnings fall below a certain threshold have payments set at $0.
- Borrowers may submit appeals when circumstances change. If there has been a significant change in income—and this reduction is documented—borrowers can submit a request to recalculate their payment plan to reflect new earnings.
- Unemployment deferments are available for up to 36 months.
- Remaining debt is forgiven for borrowers in income-driven repayment plans after a defined period of time.
What We Really Need: Education & Communication
We did not need an executive order or new legislation to defer student loan payments for individuals who lost their jobs as part of the COVID-19 outbreak. Everything was already in place to help these borrowers. When the current payment hiatus expires in September, borrowers who need it will still have the ability to reduce their payments. Many are acting like students with these loans will be thrown to the wolves and be required to make massive loan payments if emergency legislation is not extended. This is just not the case.
What we DO need is accurate, reliable information about loan repayment options available to borrowers in distress. Any increase in loan delinquency or default will not be due to a failure to provide flexibility for those in repayment. Instead, it is a failure to educate borrowers on their options and for servicers to provide easy and accessible tools for students to understand and manage their repayment.
Loan servicing companies are already reaching out to loan holders to educate them and prepare them for the expiration of these benefits. (As a loan holder, I got my first email last week). Time will tell if services have planned and staffed appropriately to accurately and efficiently field the volume of calls about unemployment deferments, income-driven repayment options, and appeals to income-driven payment schedules due to financial changes.