As Congress debates yet another round of economic stimulus, one question on the table is whether to extend the emergency aid passed in March for 43 million federal student loan borrowers. Currently, borrowers are exempt from making payments until September 30, and interest does not accrue on their federal loans during that time. This extraordinary suspension of student loan obligations was deserved as early as March, when the economy was in free fall. But now, it’s time to let the scheduled student loan payments resume and find a more permanent solution for those borrowers who are still struggling.
Although costly, the suspension of student loan payments between March and September was necessary to ensure that the economic disruption caused by the COVID-19 pandemic did not result in a massive default on student loans. While borrowers who have suffered a sudden loss of income have options to help them manage their payments, the March economy shed tens of millions of jobs. Congress therefore ruled that there was not enough time to inform and enroll borrowers in these alternative options. Millions of borrowers all asking for a discretionary suspension of their student loan payments at the same time could have overwhelmed the system. Therefore, Congress made the suspension automatic for all borrowers.
While the COVID-19 pandemic is still with us and the economy is still weak, the job market is no longer in free fall. New jobless claims for the week ending July 18 were 1.4 million: still high by historical standards, but well below their peak of 6.9 million at the end of March. The unemployment rate is also falling: 11.1% of the working population was unemployed in June, against 14.7% in April. The economy is far from healthy, but it is no longer on the edge of a cliff.
The time has come to allow the resumption of regular student loan payments, as well as the accumulation of interest. Suspending payments and interest has real budgetary costs, since a dollar paid next month is worth less than a dollar paid today. Most student debt is held by people whose median income exceeds the median income, and workers with higher levels of education (who also tend to be more in debt) have been less affected by the recession. Therefore, most of the benefits of the student loan payment break probably go to people who have never lost their jobs and are perfectly capable of repaying their loans without difficulty. Congress could distribute this money more equitably than student loan relief.
What about student loan borrowers who are struggling to make their payments due to the recession? The federal student loan system already has an answer: Income Based Repayment (IBR). IBR plans allow borrowers to tie their loan payments to their income, so the payments never consume an unreasonable portion of their household budget. If a borrower’s income drops below a certain threshold ($ 19,140 for a single person or $ 39,300 for a family of four), then payments are set to zero.
In addition, borrowers who are unemployed or experiencing severe economic hardship may benefit from a deferral, which suspends their monthly loan payments and even zeros the interest on certain types of loans.
These policies existed before the pandemic and will remain options for distressed borrowers even if regularly scheduled loan payments resume on October 1. Borrowers facing prolonged financial hardship need a permanent solution, not a temporary suspension of payments that Congress must vote to extend every six months. People who are still struggling to pay off their student loans by September 30 should enroll in the IBR or request a deferral.
Senator Lamar Alexander has proposed simplifying the current range of income-based repayment plans to make the enrollment process less confusing for borrowers. This is great, but the Department of Education should also undertake a public awareness campaign to ensure borrowers are aware of all the benefits to which they are legally entitled. According to a federal survey, only 43% of undergraduate borrowers know IBR is an option.
The suspension of student loan payments ends in two months. Rather than fighting over whether it should be extended, Congress should use that time to make sure student borrowers know what options are available to them if they are struggling to repay their loans. Suspending loan repayments for another six months will give a boost to the future and mainly benefit the better-off, but heightened awareness of the existing safety net will pay dividends for years to come.