The spread of the coronavirus within the United States has already seriously affected many states, forcing school closures and restrictions on travel and group gatherings. Likewise, while uncertainty remains about the scope and scale of the virus’s impact, local and national disruptions may cause challenges for student loan borrowers and servicers, the companies hired by the Department of Education to collect and help borrowers manage their payments.
Policymakers from Congress and the department are considering and implementing a range of tools to provide support to Americans adversely affected by the coronavirus along with temporary flexibility to help schools and colleges continue instruction. Recent research from The Pew Charitable Trusts underscores that the significant repayment challenges facing many student loan borrowers could be exacerbated during this period of social and economic disruption.
For example, borrowers working in jobs that cannot be done remotely might experience temporary or long-term loss of a paycheck. Others may become sick, need to care for an ill family member, or have underlying health issues that prevent them from working. Parents might need to take care of children enrolled in schools that close. In addition to financial insecurity, some borrowers might experience barriers to making payments or requesting repayment relief, such as inability to access post offices, banks, or areas with public Wi-Fi to make financial transactions or submit payments or other paperwork to their servicers.
Under normal circumstances, borrowers rely on their student loan servicers in multiple ways, such as by requesting temporary repayment relief through deferments or forbearances or lowering their payments through income-driven repayment plans. But servicers are also experiencing coronavirus-related disruptions, such as staffing shortages and high call volumes from affected borrowers, making it hard to provide timely responses to those seeking assistance or to reach out to borrowers in distress. For example, remote and telework options may be limited for staff who deal with secure data. Servicers’ capacities could be diminished at the same time that borrowers need additional support and flexibility to reduce their risk of delinquency and default, particularly as the administration recommends avoiding gatherings of 10 people or more.
During past federally declared emergencies—typically those with a primarily local impact such as a hurricane—Congress and the Department of Education have proposed and provided borrowers and servicers with a range of flexible options, including:
- Automatically placing affected borrowers in an administrative forbearance, which temporarily postpones payments. While interest continues to accrue during these periods, it does not always capitalize (in other words, it is not added to the principal, which increases the amount subject to future interest charges).
- Temporarily suspending collections activities against borrowers in default, such as garnishment of wages and tax returns.
- Extending the deadline for providing documentation to a servicer, such as recertifying income under an income-driven repayment program or extending periods of forbearance or deferment.
In forthcoming Pew focus group research, many borrowers said they had difficulty navigating the repayment system. These findings are consistent with a growing body of research by federal agencies, academics, think tanks, and advocates.
The Trump administration has declared a state of emergency in light of the coronavirus, allowing the Department of Education to proactively help more affected borrowers. The administration has also pledged to waive interest charges, which might provide relief for some borrowers. Policymakers have a number of additional options to help borrowers navigate the system and avoid even greater repayment problems during this period, including:
Ensuring flexibility for affected borrowers. Previous Pew research highlights the importance of providing information and assistance to at-risk borrowers when and where they need them. Payments based on income are an important way to mitigate the impact of financial difficulties for some borrowers at risk of delinquency and default. And in Pew’s focus groups, several borrowers reported that forbearances and deferments were also important for short-term relief. The Department of Education can consider directing servicers to extend affected borrowers’ deadlines for annual income recertification so their monthly payments don’t increase unexpectedly, particularly those enrolled in auto-payment, and extending periods of forbearance.
Addressing potential servicing disruptions. Pew analysis of Texas data shows that a majority of borrowers pause payments, miss payments, or default on their loans within five years of entering repayment. In Pew’s focus groups borrowers noted the negative economic consequences of delinquency and default are particularly significant, including plummeting credit worthiness, wage garnishment, or tax returns offset. In these times, many borrowers rely on servicers to help them avoid repayment problems. If servicers have difficulty offering assistance during this period, the financial impact on borrowers could be severe. For example, struggling borrowers who are not able to successfully defer their payments may become delinquent, making it harder to manage other financial obligations if their credit score decreases. Additionally, if borrowers cannot coordinate with their servicer to recertify their incomes because they cannot reach their servicer in time, some in income-based repayment plans may see their monthly payments increase by hundreds of dollars.
To help alleviate pain points borrowers already experienced navigating the repayment system before the coronavirus pandemic, the department could consider existing emergency contingencies related to servicing and work with servicers to establish clear guidance to maintain normal operating standards, particularly if servicers experience disruption or the ability of their staff to access offices is limited.
If policymakers take proactive steps now to help borrowers access flexible, affordable repayment options, many vulnerable Americans might avoid delinquency and default during this period of local, national, and personal distress.
Sarah Sattelmeyer is project director and Rich Williams is an officer with The Pew Charitable Trusts’ project for student borrower success.