Cardona suspends collection of 1 million federal student loans in default

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The Biden administration on Tuesday halted the collection of more than 1 million federally guaranteed student loans, extending relief to a subset of the borrowers who have been left out of the government’s unprecedented freeze on loan payments and interest over the past year.

The Education Department said that it would pause the collection for all borrowers who have defaulted on student loans that are guaranteed by the federal government but held by a private entity. It also will set the interest rate to 0 percent on those loans.

“Our goal is to enable these borrowers who are struggling in default to get the same protections previously made available to tens of millions of other borrowers to help weather the uncertainty of the pandemic,” Education Secretary Miguel Cardona said in a statement.

Key context: The CARES Act and executive actions from the Trump and Biden administrations had previously covered roughly 40 million Americans who owe student loans that are held directly by the Education Department. The monthly payments and interest on those loans have been suspended since March 2020, and the relief is currently set to expire at the end of September.

But the emergency relief programs have excluded roughly 8 million borrowers who owed federally-backed student loans that are held by the private sector.

Cardona’s action on Tuesday applies only to borrowers who have defaulted on their federally-guaranteed loans made by private lenders under the Federal Family Education Loan program. It does not affect roughly 5 million borrowers who are not in default on their loans under that program.

“We’re still looking at what our options there are,” a senior department official told reporters on Monday, saying it was “more complicated” for the agency to extend relief to federally-guaranteed loans that are still held by private lenders.

The official said that the Education Department was providing the relief to the defaulted borrowers under the HEROES Act, a 2003 federal law that gives the department the authority to alter the terms of federal student loans during an emergency.

How it will work: The Education Department said that it will immediately suspend the collection of 1.14 million federally-backed student loans that are in default.

The relief will apply retroactively, the department said, and the agency will refund the tax returns and wages that it seized from borrowers who have defaulted since March 13, 2020, when President Donald Trump declared a national emergency because of Covid-19.

The department said it will also refund interest that accrued on the defaulted loans dating back to last March.

Reaction: Consumer advocates praised the expansion of relief for some borrowers but said that the Education Department should go further to expand relief to all borrowers.

“Borrowers with commercial FFEL loans need Washington to stop drawing arbitrary lines that leave them without any protection or assistance,” said Seth Frotman, executive director of the Student Borrower Protection Center. “It is clear that the Department has the legal authority to protect all federal student loan borrowers during the pandemic and provide real relief— it is long past time for them to use it.”

Persis Yu, director of the National Consumer Law Center’s Student Loan Borrower Assistance project, said the group was “pleased” by the relief but said it is “not enough.”

“The millions of FFEL borrowers who have not yet defaulted but who may be struggling to make their student loan payments often at the expense of other vital necessities need relief,” she said. “The Department can provide that relief and should do so immediately.”

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