The HEROES Act fixes what the CARES Act broke
Conservatives call the House Democrats’ Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act a “gigantic political scam.” Senate Republicans say HEROES, passed by the House on May 15th, is “dead on arrival when it reconvenes. As they negotiate with Democrats, Republicans should think carefully about certain student loan relief provisions in the bill.
Even in good times, a substantial portion of 45 million Americans’ paychecks go to student loan payments rather than to goods and services that keep our economy churning. There’s little doubt that this debt contributes to suppressed consumer consumption, which stifles economic growth. In this bad time, Americans collectively owe $1.6 trillion in student debt. This debt burden is now dramatically heavier with the economic shutdown and coming diminished post-pandemic employment opportunities.
Some say no additional student loan relief is needed because the Coronavirus Aid, Relief and Economic Security (CARES) Act that Congress passed in March temporarily suspended student loan payments. That would be a decent argument if CARES applied to everyone, but it doesn’t.
With CARES, Congress gave a six-month, interest-free payment “pause” to about 35 million debtors in the process of repaying the federal government for their education. These are commonly called “direct loans.” The government imposed no penalties or credit consequences. Direct loan borrowers didn’t even have to sign up. Automatic payments just stopped.
But CARES left more than seven million borrowers with “commercial” or “private” loans to fend for themselves. During the Department of Education’s Federal Family Education Loan Program (FFEL), roughly 75 percent of FFEL loans were private, and not always distinguishable from direct loans. At least seven class action lawsuits for deceptive practices have been filed against the nation’s holder of the largest portfolio of private student loans.
After CARES became law, some private lenders offered a 90-day forbearance, with interest continuing to accrue. On a $60,000 loan at 3.75 percent interest, that’s about $500 of accrued interest for a 90-day payment “pause.”
Some private lenders wanted to tack that accrued interest onto the loan’s principal, to earn even more interest. Other lenders designed penalties, such as permanently ending the quarter-point interest-rate discount some borrowers get for automated payments. A quarter of an interest point on loans with years of repayment to go is a steep price for short-term relief.
HEROES would end the profiteering and provide protections for private debtors neglected by CARES.
HEROES’ Title V requires private lenders to modify all private loans to provide the same repayment and forgiveness terms available to direct loan borrowers. It suspends involuntary collections and negative credit reporting and requires retroactive application of forbearance to address delinquencies. These relief measures would last until September 30, 2021.
On these provisions, Democrats must stand firm. Republicans, who must recognize that a new rash of loan defaults won’t improve the economy, should cooperate. Not just because it’s “fair,” although it is: Viruses and economic crises don’t differentiate between direct and private student debt.
Rather, it’s in the federal government’s interest. Almost $170 billion in private-lender student debt is federally guaranteed. Yes, many of the same private lenders declining to give borrowers an interest-free “pause” are guaranteed to get their money back, if not from their borrowers, from U.S. taxpayers.
The debtors who would benefit most from HEROES are those who borrowed private FFEL program loans.
The last year FFEL made private loans was 2009. So, all private FFEL borrowers (in good standing) have been paying on their student loans for at least a decade. Private lenders have earned a ton of interest from them. Now, FFEL borrowers need this “pause” to help avoid the draconian consequences of default after years of diligent repayment.
To define draconian: Lenders file a default claim and are paid, both principal and interest. The loan’s title transfers to the federal government, which has incredibly powerful tools to extract repayment. They include garnishing wages, pension, social security and disability; revocation of professional licenses required to work and more.
Student loan debt cannot be discharged in bankruptcy. When a defaulted borrower enters a repayment plan, 25 percent of all future payments are diverted for “collection fees.” Interest on the principal continues to mount, seemingly without end.
Before the current crisis, 5.5 million borrowers had defaulted on $120 billion in loans. Research suggested that nearly 40 percent of borrowers could join them by 2023.
The federal government is deepening its own debt by the trillions in an effort to save the economy. Surely now is not the time for taxpayers to finance billions of additional, preventable, student loan defaults.
It’s also no time to torture private borrowers who have been conscientiously paying student loans for a decade and now may be blameless victims of the recession. None of this spells “stimulus.”
Any economic stimulus plan will struggle to be effective without real college debt relief. Congress must correct the student loan relief mistake in CARES by eliminating the discrimination between “direct” and “private” student loans. Long-term economic growth for all of us depends on it.
Tressa Pankovits is associate director of the Reinventing America’s Schools project at the Progressive Policy Institute.