COVID-19 and Student Loan Debt

As a result of COVID-19’s widespread economic disruption, the student lending industry has been impacted, from financial institutions to borrowers.  In the past few weeks, the federal government has sought ways to address the student loan industry and offer protection to borrowers affected by the virus.  On March 20, 2020, the U.S. Department of Education issued a press release announcing several student loan relief efforts in response to the spread of COVID-19 for the purpose of “giving borrowers a safety net during the national emergency.”  The press release announced the following:

  • U.S. Secretary of Education Betsy DeVos directed all federal student loan servicers to grant an emergency administrative forbearance to any borrower who requests it for a period of at least 60 days, beginning on March 13, 2020 and authorized an automatic suspension of payments for any borrower more than 31 days delinquent as of March 13, 2020, or any borrower who becomes more than 31 days delinquent.
  • Secretary DeVos also announced that the government waived interest on all federally-held student loans for a period of at least 60 days, beginning on March 13, 2020.
  • All borrowers who continue to make federal student loan payments during this 60 day period will find that their full payment will go directly toward the principal amount of their loan.

Then, last Friday, March 27, 2020, President Trump signed into law a $2 trillion stimulus package, the CARES Act (H.R. 748, 116th Cong. (2020))—the largest emergency aid package in U.S. history.   Amongst many relief efforts, the stimulus package also addressed federally held student loans.  For instance, it provides the following:

  • The stimulus package automatically suspends payment of federal student loans and sets the interest rates of federal student loans to 0% for six months, until September 30, 2020.
  • The package ensures that each month during the six month suspension will count as qualifying payments towards any loan forgiveness program or loan rehabilitation program.
  • The package provides a tax break for employers who can provide up to $5,250 student loan payments tax-free, allowing the employee to exclude it from their gross income.
  • Lastly, the package suspends collection efforts on defaulted federal student loans and suspends wage garnishment.

State regulators have also sought ways to address the pandemic’s impact on the student loan industry.  For example, on March 26, 2020, a coalition of 27 state attorneys general, including New York, Massachusetts, and California, sent a letter to the Department of Education asking the Department to provide more emergency measures to protect federal student loan borrowers impacted by the COVID-19 pandemic than they had set out in Department’s March 20th press release, described above.  For instance, the attorneys general requested that the Department extend their relief measures to all federal student loan borrowers, including those whose Federal Family Education Loans or Federal Perkins loans are not held by the Department.

In the past weeks, many states have provided guidance to financial institutions within their jurisdictions on how best to accommodate consumers during the spread of COVID-19 and the impact of its economic disruption.  For instance, the Massachusetts Division of Banks acknowledged that many financial institutions would experience a rise in delinquent and nonperforming loans, but encouraged the institutions to “offer[] payment accommodations, such as allowing borrowers to defer or skip some payments or extending the payment due date” so that consumers may avoid delinquencies and negative credit bureau reporting.  Notably, the Division promised to “consider the unusual circumstances these financial institutions face when reviewing an institution’s financial condition and determining any supervisory response.”  The Illinois Department of Financial and Professional Regulation similarly issued guidance on March 30 providing that student loan servicers “shall not engage in any unfair or deceptive practices” and make available to borrowers repayment plans, deferment options, forbearance plans, and interest relief.  Additionally, Colorado’s attorney general issued a press release urging student loan servicers to suspend their debt collection practices.

The increase in the student debt relief efforts we have seen from both federal and state governments demonstrates that this issue will likely remain at the forefront during this pandemic.  Like the federal government, state legislatures may seek to provide student debt relief through legislation–including targeting allegedly unfair and deceptive acts or practices.

Thus far, these relief efforts have been focused on federally held student loan debt; however, it would be unwise for a financial institution to ignore the evolving regulations.  While much of the state guidance financial institutions have received currently serve as non-mandatory recommendations and encouragements, private student loan servicers should be aware of the current, and possibly shifting, environment.

Lastly, in an effort to weather the economic disruption caused by COVID-19, student loan lenders and servicers should be aware of the resulting potential litigation risks.  In fact, a putative class action lawsuit already was filed in the U.S. District Court for the District of Minnesota against student loan servicer Northstar Education Finance, Inc. for allegedly suspending a monthly interest rate rebate program due to “changes in economic circumstances.”  Oksenendler v. Northstar Education Finance, Inc., No. 20-CV-00805.  In his complaint, the plaintiff alleges that in making these changes, Northstar is in breach of the loan agreement, which the plaintiff alleges he would not have entered into but for Northstar’s interest rate rebate program.  As financial institutions navigate this pandemic, the resulting economic disruptions, and the evolving regulations, it is conceivable that we see similar lawsuits in the coming months, or even weeks.