When the federal government declared the coronavirus pandemic a national emergency in March, Christopher Granado continued sending $730 each month to pay his federal student-loan bill.
He wasn’t trying to get ahead on his balance amid the COVID-era pause on student-loan payments, collections and interest. In fact, he would have preferred to put any funds he had toward making sure he was prepared for a financial emergency.
Granado, 48, a health, safety and environmental manager in the oil and gas industry, said, “I’ve been trying to save as much as I can because I don’t know whether I’ll have a job tomorrow.”
One other reason he’s continuing to pay: Granado is one of an estimated 6.1 million borrowers with $160 billion in federal student-loan debt who aren’t eligible for relief.
Since March, amid the economic devastation wrought by the pandemic, Granado and these borrowers have continued to receive student-loan bills and watch the interest on their debt build. If they’ve defaulted on their loans, they’ve had their wages garnished or tax refunds seized to repay them.
These borrowers have what is called a “commercially-held Federal Family Education Loan.”
It’s a student debt that’s owned by a bank or commercial lender, and backed by the government. Although they are part of the federal student-loan program, these loans have historically been left out of relief programs offered to other borrowers with government loans, like Public Service Loan Forgiveness in addition to the current pause on student loan payments, collections, interest and wage garnishments.
As policymakers consider the possibility of some broad-based student-debt cancellation, borrowers like Granado risk being left out once again.
“Explain to me what’s the difference,” between his loan and the federal student loans included in relief programs, Granado said. “If you’re saying that because I have an FFEL [loan] it totally disqualifies me from any of these programs that the government comes up with now, I’m like, ‘That’s not fair.’”
Repaying a student loan into her 80s
Catherine McDermott-Coffin is one of those borrowers who continues to be left out of the COVID-related student-loan payment moratorium. McDermott-Coffin took out her federal student loans in 1999, when she returned to school to become a psychologist after working for years in hospital administration.
Once McDermott-Coffin got her degree she began a job at a New York state prison. She ultimately became the director of the mental health clinic at a maximum security women’s prison and worked in the prison system for twelve and a half years.
When McDermott-Coffin first heard about the Public Service Loan Forgiveness program, which allows borrowers working in government and some nonprofit work to have their loans forgiven after 10 years of payments, she was hoping to take advantage of it.
But McDermott-Coffin learned she would have had to consolidate her debt into a direct loan and give up her 2.88% interest rate to qualify. “I couldn’t risk giving up that low interest rate for something that wasn’t guaranteed,” McDermott-Coffin said. When McDermott-Coffin first learned her federal loan was different from the ones that qualified for PSLF, “I thought it was outrageous,” she added.
“I followed the rules, I went to the [Free Application for Federal Student Aid] website, I did everything that I was supposed to do,” she said. PSLF “sounded like a really good thing and so it was very frustrating to not be eligible for it, on, in my opinion, a technicality.”
Now, despite her career in public service, McDermott-Coffin and her husband are in their 70s and still working, in part to repay the debt. They’ve been able to afford the roughly $600 monthly bill that hasn’t been paused during the pandemic because they’ve both stayed employed. McDermott-Coffin works for a nonprofit agency seeing patients in person and through telehealth.
McDermott-Coffin is slated to pay off her debt when she’s 87 and she’s calculated that by then she will have paid back $223,275, roughly double what she borrowed initially.
Policymakers’ decisions since the 2008 financial crisis have kept borrowers from accessing relief
Indeed, when Granado and millions of other borrowers took out these loans, there was likely little in the paperwork to indicate that the government viewed them differently from other federal student debt.
But policymakers’ decisions beginning in the wake of the 2008 financial crisis and continuing through today have kept these borrowers from accessing many of the benefits available through the federal student loan program.
For months, borrower advocates have been calling on Congress to include these borrowers as they consider student-loan provisions in the context of coronavirus relief bills. Now, some are urging the Department of Education to use its authority to create a pathway for these borrowers to be included in the payment pause.
“The plight of these borrowers is both completely arbitrary and unfair,” said Seth Frotman, the executive director of the Student Borrower Protection Center, one of the organizations pushing the Department to take action. “The idea that we went an entire year without a single set of solutions to try to help these people is just really unforgivable.”
‘The idea that we went an entire year without a single set of solutions to try to help these people is just really unforgivable.’
Right now, these borrowers have the option of consolidating their debt into a direct loan, another type of federal student loan that qualifies for the payment pause and other relief programs. But many borrowers who have defaulted on their loans may not be eligible to consolidate their debt.
Even for those borrowers who are can consolidate, taking that step, would, in many cases, hike their interest rate and they’d lose any progress towards debt cancellation under income-driven repayment, a program that allows borrowers to pay down their debt as a percentage of their income for at least 20 years and have the outstanding balance discharged.
During the payment pause, Carolina Rodriguez has helped borrowers weigh the decision of whether to consolidate as part of her role as the director of the Education Debt Consumer Assistance Project at the Community Service Society of New York. The system is so complicated that it’s difficult for borrowers to understand “what are the pros and cons” of consolidating, she said.
When borrowers call their student-loan company to hash out these choices, they’re often “not getting a complete picture or an answer that’s going to help them,” she said. “It’s mind boggling to them — for the right reasons — that their loans are not qualifying,” for relief, Rodriguez said of some of her clients.
SBPC and the National Consumer Law Center sent a letter to the Department of Education last week asking the agency to use its authority to get rid of these consequences of consolidation so borrowers don’t have to choose between pandemic relief and a higher interest rate. They also asked that defaulted borrowers who aren’t eligible to consolidate be allowed to do so.
The Department received the letter, a spokesperson confirmed in an email and plans to respond to it directly. The agency is, “taking a close look at options for addressing the needs of FFEL borrowers who are experiencing financial hardships,” the email reads.
Borrowers have had their wages and tax refunds seized
The letter outlines various ways these borrowers have been harmed during the course of the payment pause. By the time the payment pause expires at the end of September, a borrower with a commercially-held FFEL loan will have paid $5,700 more on average than a borrower with a loan that qualifies for relief.
In addition, guarantee agencies, the middlemen that provide insurance on these loans for lenders and also collect on them, have taken $100 million from defaulted borrowers through garnishing their wages, seizing their tax refunds and in some cases through voluntary payments, according to the letter.
This treatment has varied widely by organization and region. For example, Texas’s guarantee agency has collected more than $15 million from these borrowers during this period, while agencies in other states have taken less than $100,000.
The origins of this varied treatment of federal student-loan borrowers dates several years.
The origins of this varied treatment of federal student-loan borrowers dates several years. For decades, the bulk of federal student loans were made by private lenders, but these firms were shielded from the risk of borrower defaults through a partnership with the federal government and state agencies and nonprofits, known as guarantee agencies.
During the Clinton administration, the government piloted a program making student loans directly to borrowers, but it remained a small portion of the federal student loan portfolio due in part to objections from lenders and guarantors.
In 2008, amid the financial crisis, the Bush administration became concerned that banks wouldn’t have enough capital to lend to students, putting their ability to attend college at risk.
“The federal government began to buy those loans in order to capitalize the student-loan market,” said David Bergeron, a senior fellow at the Center for American Progress, a left-leaning think tank and a former Department of Education staffer. “That fundamentally showed the flaw in the bank-based loan program, which was when you really needed it it wouldn’t be there.”
The feds ultimately purchased billions of dollars-worth of these loans. That created three different types of debt, all part of the government’s loan program: loans made by commercial banks and lenders and still owned by those institutions, loans made by commercial banks and lenders that were bought by the federal government — these loans are eligible for the payment pause, but ineligible for some other relief programs, like Public Service Loan Forgiveness — and direct loans, or those owned directly by the Department of Education.
The Obama administration ultimately ended the bank-based loan program. Any borrower taking out a federal student loan after 2010 has direct loans, which qualify for all of the relief programs available.
‘I tried to do the right thing’
To borrowers, regardless of the type of federal loan you have, the process largely looks the same, said Cody Hounanian, program director at Student Debt Crisis, an advocacy organization. You fill out the federal form applying for financial aid, your school evaluates it and disburses the funds the form determines you need.
“It’s incredibly complex and I don’t think that individual borrowers and parents and families should suffer because the government has created a mess of these programs over the years,” he said.
When Mary Beth Smith borrowed to earn three degrees between 2000 and 2009, she specifically opted for federal student loans over private debt because she assumed they offered more protections.
“I tried to do the right thing with the choices that I made. To find out that that still wasn’t the right thing, it feels predatory,” she said. “I don’t want to use that word because it’s a little extreme, but it kind of feels that way — that we were tricked.”
Since 2014, Smith, 39, has worked steadily in the industry she studied, theater. But given restrictions on live performances, Smith was laid off during the pandemic like much of the sector. When she was receiving enhanced unemployment benefits Congress passed as part of the CARES Act, Smith put some of that money towards paying her student-loan bill.
But with those funds now expired, Smith has put her loans in an unemployment-related deferment. “I’m still accruing interest,” she said, and isn’t making progress towards cancellation under income-driven repayment. Smith said she owes roughly $250,000.
When Smith initially heard about the payment pause, she tried not to get her hopes up, even as friends were texting, urging her to check if she was eligible. When she ultimately found out, she wouldn’t be getting relief, Smith said she wasn’t surprised.
“There’s part of me that would like to tell you that I was devastated, with everything else that was going on, it just seemed par for the course,” she said. “Of course, I lost my job, of course my loans didn’t qualify.”
The news came during a period when Smith said she was struggling “both on a financial and existential level,” as the plight of artists and art more broadly were being ignored amid the all-consuming news of the moment.
“At the time I just felt very resigned to that reality as opposed to devastated by it,” she said. “At this point, I just feel really cheated and kind of abandoned by the government.”
Still repaying debt after more than 10 years
Lawmakers have taken steps towards including these borrowers. The HEROES Act, passed by the Democratic-led House of Representatives in March, included a provision that would extend relief to borrowers like Smith and Granado. In addition, a bipartisan bill introduced last year would have extended the coronavirus payment pause to these borrowers.
Logistically providing relief to these borrowers is more challenging than pausing payments on loans owned directly by the government, Bergeron said. The government would have to find a way to make the lenders that own the loans whole.
Still, policymakers should be held accountable for not working over the years to ensure these borrowers had access to the same relief afforded to their peers in the federal student loan program, said Persis Yu, the director of the student loan borrower assistance project at the National Consumer Law Center.
‘These are choices that policymakers have made to exclude these borrowers.’
Making it easier for borrowers to consolidate their debt without consequences, as the letter from NCLC and SBPC suggests, would also get around the legal challenge of making lenders who own the loans whole.
Because these loans were made before 2010 and are still being repaid more than 10 years later, “the folks that still hold this debt are more likely to have not been able to repay it in the first place,” Yu said.
“These are choices that policymakers have made to exclude these borrowers,” she said, noting that in some cases leaving these borrowers out may have made programs feasible because they cost less. “Students had absolutely no choice,” Yu added.
McDermott-Coffin continues to plow ahead with her loan payments. “I’m thankful that I’m in good health and can continue to work, I worry about if I can’t work then what am I going to do?” she said. “I know that there’s no way out of student loans.”