The Education Department announced that it will freeze collections and return garnished wages and tax refunds to student loan borrowers who have defaulted on their Federal Family Education Loans (FFEL). More than A million borrowers is going to be taught in new policy, and they will join 40 million other Americans who, since March 2022, have not accrued interest or been necessary to make payments on student education loans already owned by the training Department.
Exactly who are the borrowers in this category? Anyone who got a Stafford or PLUS student loan just before 2010 borrowed those funds from a commercial lender having a federal guarantee underneath the FFEL program. In case your FFEL loan is within good standing, congratulations! Your loan remains with a commercial lender and Tuesday's action does not affect you. However, if you defaulted on your FFEL loan and it has been used in a federally funded guaranty agency-but has not been in default so long the guaranty agency has transferred collections to the Education Department (in which case, it had been already frozen)-then you're the intended beneficiary of Tuesday's announcement. The loan repayment will be frozen until a minimum of September 2022, any wages or taxes garnished since March 2022 will probably be returned (at some point), your loan will be restored to get affordable standing, your credit rating will hopefully be depenalized, and you'll have the option to request a refund associated with a voluntary payments you've made on your defaulted loan during the pandemic.
I qualified many areas of the above since the Education Department does not yet know exactly how many people will take advantage of this insurance policy, just how much money is going to be obtained from the Treasury by means of refunded garnishments, how it will return garnishments or refund voluntary payments, or how it will coordinate the various parties required to get this to policy work. For instance, assuming the training Department can quickly identify every borrower who will be impacted by Tuesday's announcement, it can probably steer clear of the IRS from withholding their 2022 tax refunds, unless, perhaps, those individuals have already filed. But exactly how quickly will it identify-or get guaranty firms to identify-which employers should stop garnishing defaulted borrower's wages and communicate that information for them?
If this insurance policy happens to be a warm mess, it'll largely be because the FFEL program was a hot mess.
Under FFEL, the Education Department paid commercial lenders a charge to give loan to students as well as their parents. When a borrower enters repayment and defaults, the commercial lender files claims having a guaranty agency; the guaranty agency then uses Education Department funds to purchase the borrowed funds from the commercial lender for about 97 cents on the dollar; that guaranty agency then charges the Education Department to collect on the loan and contracts collections to various other firms. When the guaranty agency's business collection agencies contractors can't collect, the training Department gets control loan service and collections.
As that chain of responsibility suggests, FFEL was a case study in moral hazard. Not just did lenders and guaranty agencies make money if you don't take on risk, but annual limits on how much each student could borrow incentivized lending to as many people as possible, regardless of whether they were prone to complete their degree or had enrolled in an institution which was preparing them for gainful employment.
In the wake of the 2008 mortgage crisis, many private lenders no longer had the main city to issue new FFEL loan disbursements to students who were already enrolled, which left students in the lurch. Asking colleges to charge a small fraction of their pre-crisis rates overnight was out of the question, so Congress allowed the training Department to buy newly issued FFEL loans from the very banks the department had previously paid to issue those loans to ensure that students could continue borrowing. Ultimately, the training Department purchased roughly $150 billion in FFEL loans issued between 2007 and 2009.
The Education Department's FFEL purchase in 2009 is the reason why some FFEL borrowers have already taken advantage of the loan repayment freeze. Other FFEL borrowers have previously benefited from the freeze simply because they were in arrears such a long time that their debt had recently been moved from the commercial lender towards the guaranty agency to the Education Department. To complicate things further, some guaranty agencies which are servicing FFEL defaulted loans voluntarily froze repayment simultaneously the Education Department did. This will make total sense, in a way, since the Education Department already owns the loans that commercial lenders have transferred to the guaranty agencies, but the Education Department does not know precisely which FFEL borrowers in default whose debt remains within the proper care of guaranty agencies have had their payments frozen.
Again, if the all sounds ridiculously complicated and poorly designed, that is because it's. Congress killed the FFEL enter in 2010 for the reasons mentioned above and replaced it with Federal Direct Loans, or FDLs, which happen to be frozen since March 2022. But FFEL's complexity still haunts us because some 8 million FFEL borrowers are still available, chipping away (or not!) in their ballooning balances.
While there are likely some deadbeats one of the beneficiaries of Tuesday's announcement, the median borrower who's struggling to make minimum payments on loans issued just before 2010-with some active FFEL loans dating back the 1990s-probably needs some debt relief and is not providing much of garnishment regardless. If you think maybe in means testing, Tuesday's policy is preferable to the blanket freeze on all student education loans owned by the Department of Education, which benefitted not just households that lost income, but also white-collar workers who didn't miss a paycheck over the last year.
However, we ought to consider if the Education Department is creating a new moral hazard or any other bad incentives. For example, Tuesday's announcement states that \”any of those [FFEL] loans that entered default since March 13, 2022, will be returned to get affordable standing. The guaranty agencies that hold those loans will assign these to the Department and ask for the credit agencies take away the record of default.\” Might some people interpret that to mean they are able to or should default on FFEL loans that they are currently repaying? What if you defaulted earlier in the pandemic but could now afford repayment-why bother? What message performs this send towards the 5 million FFEL borrowers whose loans remain with commercial lenders? What message performs this send to individuals who are having their wages garnished for other sorts of debt? How about people who defaulted before COVID-19 tanked the economy, and the people who will default after the economy recovers?
Lastly, when are policymakers going to acknowledge that federal student loans have played a significant role in driving up the price of education, which dipping in to the public fisc to repay debts incurred due to cost inflation is really a vicious circle that's certain to repeat itself?
1 comment