There is a lot to talk about on this topic between the pandemic and Department of Education updates, but it is organized into several categories to make it easier for you to scan and choose what you wish to study further. (You might want to grab a beverage before digging into this one!)

Managing student debt during the pandemic--CARES Act

The CARES Act provides temporary student loan relief through September 30, 2020.  Only Federal loans are covered by this, not private or federally guaranteed loans held by commercial banks, like some FFEL and older Perkins loans. 

• Student loan payments are paused.
• If you are enrolled in a forgiveness program, non-payment will not hurt your status.
• Interest is suspended - no interest is accruing on outstanding loans.
• Collections on defaulted federal student loans have stopped.

However, Consumer Groups have reported that wages and tax returns were still being garnished for certain borrowers.  You should apply for a refund if this is the case.  Also, at least one servicer (Great Lakes) has incorrectly reported the status of 5 million loans, negatively impacting the borrowers’ credit. If you made a payment after March 13 but before the CARES Act was passed and really need the money, you can contact your servicer to request a refund.

If you are in a position to make your usual payments, doing so will make a bigger dent in the amount you owe.  But if you do not have adequate emergency savings, as this pandemic proved to everyone is critical, it might be worth boosting that emergency savings with what you would have paid towards your loans.  Or if you have higher interest debt, use the funds to reduce that debt instead of your student loans.  

If you have lost a job or suffered a decrease in income, be sure to recertify your earnings if you are in an income-based repayment plan, or try to get into an income-based program if you aren’t!  If necessary, now would be the time to apply for deferment or forbearance.  September 30 will be here before you know it!  As Covid now rages in many states and the economy is in question, there could be lots of defaults on student loans if nothing more is done legislatively.  While the proposed HEROES Act may include additional student loan provisions, that is yet to be determined.

US News, Cleveland.com, Politico, Forbes (Minsky), Forbes (Friedman), Forbes (Whistle)

Financial Aid for 2020-21

Given data on how household income has been impacted by the pandemic, what would be helpful for students who might need more aid to attend school next year, or those considering taking time off?  PennyHoarder posted a helpful Q&A on this topic. While every school will be different, there are a couple of considerations that hold true for anyone finding themselves in a worse financial position.

• You should apply for additional aid from your school, but understand responses may take longer (see next paragraph).
• If you initially turned down loans in your financial aid package, you can reapply for them.
• Before deciding to take a “gap” year and wait for this all to pass, understand that if you already have student loans, this will start the clock on the Federal loan’s 6-month grace period, and you will have to start paying them pack.  

For the Great Recession, the Department of Education issued guidance letters, basically allowing schools to streamline the process for amending student aid decisions in light of the changing economic environment.  In May 2020, the Department of Education explicitly stated that these guidance letters no longer apply.  The threat of an audit/fines for schools has basically hamstrung them in terms of offering additional aid to students whose financial situation is no longer represented by the 2018 financials upon which their aid package was based. (NPR)

Federal Student Loan Servicing Changes

We have already mentioned loan servicers, the agencies that manage student loan repayment on behalf of the Department of Education.  These loan servicers have a poor track record when it comes to transparency and accountability in handling loans and their customer service. The Department of Education is totally reshaping the repayment system, trying to centralize the payment platform, and contracting with five (new) servicers when current contracts expire on December 14, 2020..    

• EdFinancial Services
• F.H. Cann & Associates LLC
• MAXIMUS Federal Services Inc.
• Missouri Higher Education Loan Authority (MOHELA)
• Texas Guaranteed Student Loan Corporation (Trellis Company)

The CFPB noted that the last time the Department of Education tried to overhaul servicers in 2015, things did not go smoothly.  There was lots of confusion and missing and misapplied payments.  At this point, the existing servicers, like Navient, Nelnet and Great Lakes, that will no longer enjoy this business are making quite the stink about the proposed change.  Nelnet is even taking legal action.

If you are currently repaying student loans, you should continue to pay them as you have been (hopefully they are automated!) until you get direction from the Department of Education, at which time you should adjust your automatic payments to go to the correct servicer, (and keep your fingers crossed that all goes smoothly?)

Forbes 1  Forbes 2

Updates on Loan“Forgiveness”

Congress failed to overturn a Trump veto on legislation to prevent the Department of Education from enacting a weakened version of the Borrower Defense to Repayment program effective July 1. This loan forgiveness program was originally created to provide student debt relief to students who were defrauded or otherwise harmed by predatory colleges and universities.  Usually, these are for-profit schools, and often, they close, leaving students with no degree but lots of debt.  Veterans comprise a large proportion of these cases, as these for-profit institutions market heavily to them to get their GI Bill funds.

In the meantime, the Department of Education held up 170,000 applications for relief from this program.  Several class action lawsuits have been filed against the Department of Education on behalf of those seeking relief, and a Federal Judge subsequently ruled on one of these lawsuits, ordering the Department of Education to cancel the outstanding debt for 7200 borrowers. Another lawsuit was filed just today (7/16/20). The other way the Department of Education has been handling these applications is to “approve” the claim filed under the program, but only relieve a fraction of the debt.

There has also been much angst recently over the Public Service Loan Forgiveness program. The Public Service Loan Forgiveness Program is a federal program that forgives federal student loans for borrowers who are employed full-time in an eligible federal, state or local public service job or 501(c)(3) nonprofit job who make 120 eligible on-time monthly payments.  The program was started in 2007, so only recently have potential beneficiaries hit the 10-year (120 payment) point and applied for forgiveness.  As of April 2020, approximately 147,000 borrowers have had their applications rejected.  

As originally set up, a qualifying employer was described on the Department of Education website, but many were surprised (after the fact) to learn their employer did not qualify them for forgiveness.  Now, the Education Department website’s tool makes this more definitive.  Currently, the employer database contains more than 1 million eligible employers.

NPR,  Forbes 1,  Forbes 2

Income Share Agreements

This update on ISAs covers a few things.  The underlying theme to recent articles is “borrower beware!”  This is particularly true as about sixty schools now offer these arrangements, where students are fronted varying amounts of tuition money, and in return, pay the school/lender a percent of their income over a period of time.  What is proving to be true is that not all ISAs are created equal.  Some may end up costing borrowers more than a loan.  Theoretically, ISAs could be a better deal than many private loans or Parent Plus loans.  (CNBC) Here is the current situation.

• Many students have to borrow on top of the ISAs to cover all of their costs.  
• As the amount lended and repayment terms are often linked to expected earnings, the terms are much less favorable to those going into lower paying fields, like education.  ISAs are not helping level the playing field in educational attainment.  They are investment vehicles, and investors are looking for returns.
• Some lenders are bundling the ISAs and selling slices of the bundle, like any other collateralized debt obligation (CDO). (more on this topic under “Other”)
• Some companies (Vemo Education, for one) are accused of using predatory practices to attract “borrowers,” and consumer advocates are calling for the FTC to jump in and regulate. (WaPo)
• ISAs are becoming politicized, as the Department of Education weighs jumping into the ISA pool with a pilot program, and legislators and consumer advocates are calling for regulation and protections.

For more information and examples of how these are working at a variety of institutions, read Hechinger Report and Education Dive.

Financial Aid - General

There is a long-held notion that federal student aid has been responsible for the huge increases in the sticker prices of colleges and universities, particularly the private ones.  The question up for debate is, why should a student receive more financial aid to cover the cost of an expensive school? (Aid is based on the expected family contribution calculation (EFC), which is subtracted from the total cost of attendance to determine aid.)  Should all federal aid be a fixed-dollar amount per person based on a family’s financial situation, but independent of the institution, similar to the Pell Grants (currently capped at about $6000/year)?  And leave it to the institutions to grant aid from other sources to compete for butts in seats?

And so much aid is left on the table to begin with, given the complexity of the FAFSA, coupled with the varying requirements of states and institutions.  Is it time to simplify the process (again).?  This NY Post article discusses these issues. And the results of this Gallup poll suggest that the financial aid process had a big influence on the college decisions for 40% of the students polled, impacting non-white, first generation students to a much higher degree.

When it comes to merit aid, a paper published by New America collected data from 2010-2017 on merit-based aid and found that 40% of it is going to students who could otherwise afford to attend without the aid.  This is done in an effort to attract these students away from other institutions, with the idea that they bring more to the university in the long run.   

Other

What is the “shadow” student loans market?  Loan servicers “package” thousands of student loans into asset backed securities/bonds which are then sold to investors, (like mortgages were packaged and resold leading up to the Great Recession.)  This situation, practiced to a great extent by the loan servicer Navient, pits the interests of the borrowers against the interests of the bond holders.  This Planet Money story is worth a listen.  It tells the story of a woman who sued her loan servicer to try to find out exactly who owned the $250,000 of student loans she still owed.  A WSJ reporter learned of her case while researching this article, and helped her figure things out.

If you are into data, Inside Higher Education summarized two publications from Liberty Street Economics (NY Federal Reserve), one linking zip code to educational attainment, student loan debt amounts and defaults, and another linking merit aid to spending and debt by race. Here are the key takeaways:

• Majority white ZIP Codes have highest college attendance rates, followed by majority Black ZIP codes.
• People from majority white ZIP Codes attended four-year colleges at higher rates compared to the other groups.
• People in majority Hispanic ZIP Codes had the highest attendance rates for two-year colleges.
• People from majority Black neighborhoods who attended college are more likely to take on student loans than those from majority white or Hispanic areas.
• Across all ethnicities, those borrowing for two-year colleges are 50 percent more likely to default on their loans than those who went to 4-year colleges (likely due to employment outcomes).
• Over all, researchers found that merit aid eligibility increases debt levels for students in their early 20s but reduces it later in life.

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