By Ben Kaufman and Persis Yu | February 16, 2021
Since last March, Congress and the executive branch have offered most federal student loan borrowers a pause on their monthly payments, a 0% interest rate on their loans, and protection from debt collectors—all badly needed forms of relief in the face of the pandemic. But since the start of COVID, millions of student loan borrowers have been left out of this assistance. Borrowers left without relief include those with private student loans, federal Perkins borrowers, and certain federal loans originated under the now-defunct Federal Family Education Loan Program (FFELP). These millions of borrowers are grappling with COVID and its economic fallout, while peers with qualifying loans have been able to benefit from key federal aid.
Borrowers left without relief during the pandemic include 6.1 million people who owe more than $160 billion in FFELP loans but whose loans happen to be held by private creditors.[1] These borrowers are collectively referred to as “commercial FFELP” borrowers. Commercial FFELP borrowers’ combined student loan balance is larger than the entire private student loan market, larger than the payday loan market, and larger than the total amount of past-due medical debt in the U.S. Moreover, these borrowers have long been the targets of some of the shadiest actors in the student loan industry and have too often been left holding the bag when the government breaks its promises, such as when federal mismanagement has denied borrowers relief through Public Service Loan Forgiveness (PSLF).
This unfair treatment must end.
Today, we wrote to the Department of Education (ED) to call for commercial FFELP borrowers to get desperately needed relief during COVID and for ED to rectify past and present wrongs that have imposed historic hardship on these borrowers. The Biden administration has the tools to protect these borrowers. It’s time for it to use them.
A Wall Street Bailout That Helped Create a Mess for Over Six Million Borrowers
While FFELP loan origination may have ended in 2010, neither these debts nor the borrowers struggling to pay them are going to simply disappear as a matter of concern for policymakers. In fact, back in January 2020, bonds that are backed by commercial FFELP loans were already projected not to pay out until as late as 2083, when some of the borrowers owing on the loans underlying those bonds are slated to be over 100 years old. These estimates reflect that many borrowers’ hopes of repayment have long been dimming.
The mere fact that we have a distinction across types of FFELP borrowers is the living legacy of the massive, taxpayer-funded “federal bailout programs” Congress authorized to rescue Wall Street and the student loan industry during the last financial crisis.
The mere fact that we have a distinction across types of FFELP borrowers is the living legacy of the massive, taxpayer-funded “federal bailout programs” Congress authorized to rescue Wall Street and the student loan industry during the last financial crisis. Before the Great Recession, all FFELP loans were owned by private creditors like banks and insured by the federal government. But after markets failed in 2008, Congress stepped in to save some of the largest financial institutions in the world from enduring stress on their student loan portfolios, purchasing a huge share of FFELP loans outright using dollars drawn straight out of American taxpayers’ pockets. Those FFELP borrowers whose loans ED happened to buy are now called “ED-held FFELP” borrowers, and those borrowers whose loans ED left on private books are “commercial FFELP” borrowers.
Since the time of this bailout, the millions of people left with their federal student debts still on banks’ balance sheets have faced some of the harshest realities of our broken student loan system. Borrowers have been robbed of key repayment protections, servicemembers have had their rights violated, teachers have been ripped off by their creditors, and public servants have had promises of loan forgiveness broken.
Commercial FFELP Borrowers Have Been Arbitrarily Carved Out of Federal Student Loan Relief During COVID, Leaving Them to Grapple with Massive Costs
Commercial FFELP borrowers have never been legally distinct from any other FFELP borrowers with regard to the availability of federal student loan protections—until COVID. Now, for the first time, the executive branch and Congress have chosen to make the arbitrary distinction between commercial and ED-held FFELP borrowers a deciding factor in who will be eligible for student loan relief during the pandemic, and who will be left to deal with student loan bills as the country faces the worst economic crisis since the Great Depression.
First, at the outset of COVID, the Trump administration denied commercial FFELP borrowers access to an interest suspension that it made available to borrowers with Direct and ED-held FFELP loans. Then, Congress expanded and cemented this disparity by denying commercial FFELP borrowers the badly needed payment pause, 0% interest rate, and protection from debt collectors that the CARES Act granted to other federal student loan borrowers. Congress also provided that the months a borrower spends in the payment pause will count as qualifying payment periods for student loan forgiveness through PSLF or Income Driven Repayment (IDR), but again excluded commercial FFELP borrowers. Over eleven months, and across two presidential administrations, executive action has continued to offer Direct and ED-held FFELP loan borrowers relief while completely ignoring those with commercial FFELP loans.
After a year without help, the lack of relief for commercial FFELP borrowers has mounted. Now, over 1.2 million borrowers owing over $41 billion in commercial FFELP loans—more than a quarter of these loans that are outstanding—are in an interest-accruing forbearance or in default.[2]
But what is at hand here is much more than statistics. Underlying the delinquency and default data are millions of individual borrowers, each struggling to make ends meet during a pandemic all while being denied relief due to no fault of their own decision-making. Narratives that these borrowers have relayed to the Consumer Financial Protection Bureau paint a picture of a student loan system failing vulnerable borrowers just when they need help the most:
The Financial Fallout of Commercial FFELP Borrowers’ Unfair Treatment Goes Far Beyond Their Monthly Student Loan Bills
The pain that Washington’s policy decisions have imposed on commercial FFELP borrowers has implications across these borrowers’ financial lives. In particular, commercial FFELP borrowers’ student loan obligations average $300 per month, implying that the typical commercial FFELP borrower will have paid $5,700 on these loans since March 2019 by the time the Biden administration’s current payment pause expires in September 2021.
In households across the country, the fact that commercial FFELP borrowers are still on the hook for these monthly student loan payments could be the difference between being able to put food on the table, maintain a roof above their family’s head, and keep the heat on during the winter, or having to go without basic life necessities. For example:
- One in nine Americans is food insecure; the $5,700 that the typical commercial FFELP borrower will have put toward these loans from March 2020 through September 2021 could have paid for more than 12 trips to the grocery store for the average family of four.[3]
- One in three renters has reported housing insecurity since the start of the pandemic; those $5,700 in student loan payments could have covered over four months of rent for the median two-bedroom apartment in the U.S., allowing many borrowers to stave off eviction.[4]
- More than 60 percent of Americans have been at risk of utility shut offs during COVID; the amount a commercial FFELP borrower will pay on these loans by the fall would cover over 13 months of the average utility bill.[5]
The repercussions of the student loan payments commercial FFELP borrowers are making during COVID will only grow over time. These repercussions include the loss of an opportunity for borrowers to pay their way out of higher-interest debts. Consider two identical borrowers, one with commercial FFELP loans and one with ED-held FFELP loans. Like many, these two borrowers may have outstanding balances on high-interest credit cards. However, with payments paused during COVID, the ED-held FFELP borrower could use the freed up monthly $300 to pay down the balance. Meanwhile, the commercial FFELP borrower may be stuck making only the minimum payment. If the two borrowers follow this course of action while both owing the national average balance of $5,313, the ED-held FFELP borrower would emerge at the scheduled end of the payment pause in September 2021 having already paid off the entire credit card balance, while the commercial FFELP borrower would have barely made a dent, still owing $5,026.[6] Paying down the remainder of that balance while continuing to make only the minimum payment would take the commercial FFELP borrower several additional years and require paying an added $17,105 in interest beyond the interest expense incurred by the ED-held FFELP borrower.[7]
By the same token, an ED-held FFELP borrower may choose to invest the paused student loan payments in a retirement account while the commercial FFELP borrower remains required to cover the monthly student loan bill. An ED-held FFELP borrower who simply allocated the paused payment into an S&P 500 tracker each month since March would have seen an over 21 percent return on investment through the start of February 2021, generating almost $4,000 of wealth on only $3,300 in contributions.[8] The commercial FFELP borrower, meanwhile, would have paid $3,300 to a student loan company over the same period. Even if the ED-held FFELP borrower’s $4,000 generates only a much more modest 5 percent annual rate of return for the next 20 years, that borrower will have over $10,605 to enjoy later in retirement.
The unfair structure of payment relief during COVID implies that commercial FFELP borrowers pursuing debt forgiveness will have to pay thousands of dollars more down the line for the same amount of loan cancellation in the future.
Finally, the unfair structure of payment relief during COVID implies that commercial FFELP borrowers pursuing debt forgiveness will have to pay thousands of dollars more down the line for the same amount of loan cancellation in the future. Borrowers with both ED-held and commercial FFELP loans are eligible for income-based repayment (IBR), a federal student loan repayment plan that sets FFELP borrowers’ monthly student loan bill at 15 percent of their discretionary income and offers loan forgiveness after 25 years of qualifying payments. However, while commercial FFELP borrowers will have to continue paying on their loans to make progress toward IBR forgiveness during COVID, the terms of the CARES Act and subsequent administrative student loan relief dictate that ED-held FFELP borrowers in IBR will get credit toward forgiveness even in months when their payments are paused—that is, when their payment obligation is $0.
As a consequence, we estimate that a commercial FFELP borrower with a moderate income will have had to pay over $8,000 in student loan bills to get credit for time in repayment toward loan forgiveness when the current federal student loan payment pause ends in September, 19 months after it began in March 2020.[9] Over the same period, an identical ED-held FFELP borrower would have earned 19 qualifying payments toward IBR forgiveness without having to pay a single penny. Should the two borrowers continue on their parallel paths after COVID and secure relief in the same month in the future, the commercial FFELP borrower will have paid $8,000 more to earn the same benefit. Moreover, if the Biden administration extends student loan borrower relief again past September while retaining this disparity for commercial FFELP borrowers, this difference in the cost of forgiveness will only grow larger.
The list of financial risks for commercial FFELP borrowers due to their still having to make student loan payments goes on, and it includes the possibility of not being able to cover a healthcare deductible if they, like millions of others, should contract the coronavirus. But instead of relief, financially strapped borrowers have received only more student loan bills.
As Washington Ignores Millions, the Most Vulnerable Borrowers are in Industry’s Crosshairs
The lack of student loan protections during COVID has also left the most vulnerable borrowers open to abuse by a debt collection industry that has hardly slowed down its work during the pandemic.
Data from ED reveals that guaranty agencies—the hybrid insurers, servicers, and debt collectors at the heart of the commercial FFELP market—have syphoned over $100 million from defaulted commercial FFELP borrowers since the start of COVID.
There are currently 830,000 borrowers in default on over $24 billion in commercial FFELP loans. These defaults have massive, long-lasting consequences including wage garnishment, the offset of federal benefits such as Social Security, and a lifetime of damaged credit. Had commercial FFELP borrowers happened to owe on Direct or ED-held FFELP loans, they would have been shielded from these extraordinary collection tactics. Instead, data from ED reveals that guaranty agencies—the hybrid insurers, servicers, and debt collectors at the heart of the commercial FFELP market—have syphoned over $100 million from defaulted commercial FFELP borrowers since the start of COVID.[10]
Adding to the unfairness, ED’s data indicate that whether these borrowers are targeted by debt collectors after defaulting may depend in part on where they lived when they went to college, with some states’ guaranty agencies raking in millions of dollars since March 2020 while others have elected to be much less aggressive. For example, while Texas’s guaranty agency Trellis has taken in well over $15 million from defaulted commercial FFELP borrowers through administrative wage garnishment since the end of March, several state guaranty agencies—including those of Utah, New Hampshire, Michigan, Oklahoma, New Mexico, and Louisiana—have each collected less than $100,000 since March by the same method. This disparity cannot be explained away by differences in population; Michigan, for example, has roughly a third of the population of Texas, but has collected far less than a third through its guaranty agency during COVID.
The most vulnerable commercial FFELP borrowers’ financial security during a pandemic shouldn’t depend on the state-by-state whims of the student loan debt collection industry. These borrowers deserve the same strong federal protections as peers with Direct or ED-held FFELP loans.
It’s Time for the Biden Administration to Stand Up for Commercial FFELP Borrowers
Eleven months into the pandemic, commercial FFELP borrowers are facing thousands of dollars of added costs and compounded financial insecurity that will last far beyond the scheduled expiration of qualifying federal borrowers’ payment protections in September.
The Biden administration can and must end this unfair treatment. The previous administration exercised executive authority to cancel student loan interest charges, pause loan payments for over 40 million federal student loan borrowers, and stave off collections on defaulted borrowers. The Biden administration should use the same tools to finally offer relief to millions of federal student loan borrowers who have been left behind, and that it can do so while waiving penalties that might keep borrowers from accessing relief.
But the work cannot end there. Answering the President’s call for the nation to “Build Back Better” in response to COVID, the new Administration must meet the current moment by recognizing and addressing the full breadth of policy errors and industry abuses that commercial FFELP borrowers have had to endure over time. In particular, commercial FFELP borrowers should be offered opportunities for comprehensive retroactive relief for past errors that have added unnecessary costs to their loans or led to the loss of promised loan relief. For example, ED can use its existing powers to ensure that public service workers get credit towards PSLF based on monthly payments that borrowers made on ineligible FFELP loans, including canceling these loans outright where a FFELP borrower has previously made 120 otherwise-qualifying payments. As has been documented at length elsewhere, administrative errors, policy choices, and extensive industry breakdowns have kept commercial FFELP borrowers from securing relief through income-driven repayment, work in public service jobs, and other legal avenues for discharge. These borrowers need more than a chance to obtain the benefits of ED’s loan consolidation program without losing progress toward loan forgiveness; they need the government to follow through on promised relief for which these borrowers should have already qualified, but which they have so far been denied through no fault of their own. This is just the start of the badly needed relief and redress the administration can offer borrowers—if it chooses to.
Every day during the pandemic, millions of student loan borrowers have gone overlooked by Washington and left to struggle alone because they happen to have the wrong type of loan. The scars of these harms will linger long past any vaccination at the end of COVID. The Biden administration can end this unjust treatment.
But it must act now.
Read our letter to the Department of Education here: https://protectborrowers.org/nclc-sbpc-commercial-ffelp-letter-to-ed
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Ben Kaufman is a Research & Policy Analyst at the Student Borrower Protection Center. He joined SBPC from the Consumer Financial Protection Bureau where he worked as a Director’s Financial Analyst on issues related to student lending.
Persis Yu is a staff attorney at NCLC and is the director of NCLC’s Student Loan Borrower Assistance Project. She also works on other consumer advocacy issues.
[1] SBPC calculations based on FSA Data Center.
[2] SBPC calculations based on FSA Data Center.
[3] SBPC calculations based on BLS. Assumes two trips to the grocery store per month.
[4] SBPC calculations based on Rentable; see also Eviction Lab.
[5] SBPC calculations based on BLS.
[6] SBPC calculations. Assumes a starting credit card balance of $5,313 at an interest rate of 20.5 percent and minimum payments at the greater of $50 or two percent of the borrower’s outstanding balance.
[7] Id.
[8] SBPC calculations based on Yahoo Finance data through 2/8/2021.
[9] Comparison is of two borrowers who both earn the median household income in the U.S., $68,703. One borrower has commercial FFELP loans while one has ED-held FFELP loans, and both borrowers have been pursuing loan forgiveness through IBR and had made the same number of qualifying payments toward forgiveness when COVID started.
[10] SBPC calculations based on FSA Data Center.